THE TEACHER Be­ware the fi­nan­cial ‘vam­pires’ and choose as­sets to build wealth

The National - News - - MONEY -


Would you rather buy things that make you richer or poorer? It may seem a con­tra­dic­tion that the things you spend money on can make you money, but it is pos­si­ble it can be what sep­a­rates the truly wealthy from the rest of us.

The key con­cept to un­der­stand is that there are things that you buy that gen­er­ate in­come, which are called as­sets. De­pend­ing on who you talk to, there are five or six as­set cat­e­gories: stocks, bonds, real es­tate in­vest­ment trusts, cash or money mar­ket funds, fu­tures or cur­rency trad­ing, and al­ter­na­tive as­sets such as gold, art­work, cryp­tocur­rency, stamps.

Some of these as­sets are more prof­itable than oth­ers, and some take spe­cialised knowl­edge to make money from. But with these, you have the chance to make in­come with­out go­ing to work for eight hours a day. If you have enough as­sets that gen­er­ate enough in­come to cover your ex­penses, you don’t ever have to work again.

If you buy as­sets, you are mak­ing your money into em­ploy­ees. Each dirham goes to work ev­ery day, cre­at­ing more dirhams. If you give your as­sets enough time and choose good as­sets, this process com­pounds, so that the money makes more money, which makes more money for ever. You don’t get rich overnight, and you es­pe­cially won’t get rich if you spend the money your as­sets gen­er­ate in­stead of buy­ing more as­sets with that. But if you’re pa­tient and con­sis­tent, even­tu­ally you will have an army of dirham em­ploy­ees mak­ing more money in a month than you can in a year at your 9-5 job.

In the Fi­nan­cial In­de­pen­dence move­ment, many peo­ple use in­dex funds, which track the en­tire stock mar­ket for al­most no cost. Van­guard is ex­tremely pop­u­lar with funds like VTSAX and VTI, which buy shares in the en­tire Amer­i­can stock mar­ket and charge you 0.04 per cent fees.

The US stock mar­ket has his­tor­i­cally gen­er­ated re­turns of be­tween 10-12 per cent de­pend­ing on which cal­cu­la­tion you look at. Van­guard and their com­peti­tors like Fidelity and iShares also have low-cost funds for other coun­tries as well, or even the en­tire world.

You can eas­ily cre­ate a port­fo­lio of low-cost in­dex funds, al­low­ing you to skip the mas­sive fees UAE fi­nan­cial ad­vis­ers tra­di­tion­ally charge. In the UAE, many in­vestors buy their own in­dex funds through bro­kers such as Saxo Bank, In­ter­na­tional Bro­kers, and Swiss Quote. The great thing about in­dex funds is you don’t need spe­cialised knowl­edge about in­di­vid­ual com­pa­nies, and if you give it enough time, and past his­tory con­tin­ues, the stock mar­ket will con­tinue to make you money, which will com­pound and make you wealthy.

Sadly, most peo­ple spend all their money on things that end up cost­ing them even more money, crush­ing any hopes of wealth or fi­nan­cial in­de­pen­dence. Clothes, shoes, phones, TVs, spa treat­ments, cars and even your own house fall into this cat­e­gory of “li­a­bil­i­ties”.

The money you spend on them is just gone, and for cars and houses, the cost of pur­chas­ing them is just the be­gin­ning. Af­ter that you have in­sur­ance, re­pairs, petrol, etc, which make these li­a­bil­i­ties a never-end­ing drain on your bank ac­count. Li­a­bil­i­ties are fi­nan­cial vam­pires, and they’re at­tached to your wal­let.

“But wait,” you may be say­ing. “My house is an as­set. It gains value and I can sell it later for a profit.” To that I say: “Um, maybe, if you’re lucky”. Hous­ing does some­times ap­pre­ci­ate in value if you buy where a lot of peo­ple want to live. But there is no guar­an­tee of this. A lot of peo­ple lose money on hous­ing, like my par­ents, who al­ways seemed to move just be­fore the prices went up.

It can get es­pe­cially dev­as­tat­ing if you’re try­ing to sell af­ter an eco­nomic down­turn like we had in 2008, when mil­lions of peo­ple of­ten lost half the value of their prop­erty nearly overnight. You re­ally need a crys­tal ball to de­ter­mine if your house will ap­pre­ci­ate in value more than the thou­sands and thou­sands of dirhams you will pay out to main­tain it.

This changes if you own a house you then rent to oth­ers. Then the house be­comes an as­set that gen­er­ates in­come. But if the house is your per­sonal res­i­dence, it’s a cost, a li­a­bil­ity, and you need to re­alise to en­sure you make more ra­tio­nal fi­nan­cial de­ci­sions.

I’m not say­ing that buy­ing as­sets is with­out risk. You can buy stock in a com­pany that goes bank­rupt (a risk minimised by buy­ing in­dex funds which con­tain thou­sands of com­pa­nies). You can buy a rental prop­erty that burns down and your in­sur­ance de­cides not to pay out (make sure your in­sur­ance is from a good bro­ker).

As­sets can burn you. The key dis­tinc­tion is that while it’s pos­si­ble you’ll lose money buy­ing as­sets, it is pretty much guar­an­teed you will lose money by buy­ing li­a­bil­i­ties.

Wouldn’t you rather buy things that made you rich?

While it’s pos­si­ble you’ll lose money buy­ing as­sets, it is pretty much guar­an­teed you will lose money buy­ing li­a­bil­i­ties

Dubai school teacher Zach Holz doc­u­ments his jour­ney to­wards fi­nan­cial in­de­pen­dence on his per­sonal fi­nance blog The Hap­pi­est Teacher

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