Ownership and Building Wealth

by Dual Income No Kids on February 27, 2008 · 0 comments

As you’ve probably observed already, there is a LOT of information available on personal finance. When going over the literature I try to take a critical view of what I’m reading. Like you I’m mostly focused on bits of wisdom might be helpful for achieving our goals. Also, like you I’m mostly interested in information that helps us take effective action – for example learning that having super rich parents helps your net worth doesn’t help because most people can’t change who their parents are.

One actionable theme I’m starting to hear from several different personal finance writers is the importance of ownership. Popular writers like Edelman, Stanley, Charles Carlson and Lisa Keister all indicate that the wealthy are heavily involved with ownership. Specifically ownership of three things:

1) Housing
2) Business Assets
3) Stocks

So, given this consensus it seems to make sense to focus your efforts on these three things. Here’s some thoughts on how they improve your financial situation.

1) For housing, own your own home. There are a number of personal and sociological advantages to owning a home. But more importantly, home ownership has built in mechanisms that increase your bottom line. First, federal and state tax systems usually allow you to deduct your home interest payments, so you pay less in taxes. Second, with many types of loans you build up equity over time by paying down your principle. In this case, the idea here is that these two mechanisms steadily increase your net worth over time.

2) Business Assets Increase Income. Many millionaires tend to be self employed individuals who spend a great deal of time seeking out investing or income opportunities. Since healthy business assets tend to generate a great deal of income, having business assets means your wealth rises. So, basically business assets improve your cash situation. In this case the math is pretty simple. Lets say your business turns a $100 profit after expenses. Well, you’re $100 bucks richer than the person who’s not in business, all other things being equal.

3) Stocks Increase In Value and Pay Dividends. Stock are great ways to build wealth. It’s not surprising that most writers of personal finance literature have linked stock ownership with high net worth. Stocks increase your net worth in at least two ways. First, they can appreciate in value. Second, stocks make cash payments in the form of dividends. So, assuming your selection of a stock is sound, price increases and the amount stocks provide in dividends can help improve your bottom line.

When thinking about money its important to consider effective ways to build wealth. When you take a close look at what people write about personal finance, the theme of ownership keeps coming up. But specifically ownership of three things: housing, business assets and stocks. This suggests you might focus on these to help you financial situation.

Best,

James

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