Step Seven: Acquire Assets and Passive Income | Alex's Guide To Building Generational Wealth

After you develop your Savings Plan and Manage Risks, the next step toward building generational wealth is to Acquire Assets and Passive Income. This critical step is a culmination of successfully implementing steps 1-6. Once you do this, you should be in a position to start building up your assets.  You can start by acquiring the assets you need, then acquire productive assets, followed by assets you desire. Throughout this section we will explain these different types of assets, why they are important to have, and how to go about acquiring them.

What are assets?

An asset is simply something you own. Technically, anything thing you own is considered an asset. Most assets contain value. Some assets have value that will grow over time, others have value that will diminish over time. Some assets are useful by either providing income or another benefit to you while you own it. Others provide no use whatsoever other than storing value.

Acquiring assets is key to developing generational wealth, but not all assets are created equally. There are assets we need (i.e. shelter, transportation, money to buy food), assets that are productive (i.e. investments, real estate, businesses), and assets that we desire (sports car, season tickets, nice watch). None of the types of assets are bad, and I encourage everyone to build up assets of each of the three categories. However, if our goal is to build generational wealth, it’s important to prioritize our spending on assets we need first, assets that are productive second, and assets we desire third. The best assets are the ones that fit into 2 or all three of these categories. The chart below details some examples of assets and which category they fall into.

Why is it important to acquire assets?

The process of building generational wealth starts with building your personal wealth. Your personal wealth is measured by your net worth, and your assets are an important factor when calculating your net worth. The more net worth you can build during your lifetime, the more you will pass on to the next generation, and the more you will contribute to building generational wealth for your community.

You’ve probably heard of a balance sheet before. Usually, you will hear this term in the context of large corporations because it is one of their key accounting requirements. Individuals and families also have their own balance sheets. A balance sheet is simply a list of all your assets and all of your liabilities. The value of all your assets subtracted by the value of all your liabilities is equal to your net worth. A balance sheet is just all these factors listed out. You can create your own balance sheet on Excel, or schedule a meeting with your financial planner, who should have the software available to help you put one together. Once you have your balance sheet, make sure to update it regularly to monitor your progress toward building generational wealth.

Other than assets we need, assets that are productive are the most useful when building generational wealth. I define productive assets as anything that has a growing value over time or provides income that you can live off. When it comes to planning for life events like retirement, these assets are key, especially the ones that provide passive income.

What assets provide Passive Income?

Assets that provide passive income give us the money to satisfy our monthly spending needs, while allowing our other assets to continue growing over time. Passive income means that we are not actively working to create this income. The income just flows in passively. Sounds great, right? The only catch is that these types of assets typically require a lot of up-front capital to acquire.  It typically requires either some luck or years of planning and saving to acquire these assets. Regardless, outside of your needs, these assets should be high on your priority list if your goal is to build your net worth and contribute to generational wealth.

Here's a few of the most productive assets that can provide passive income:

• Real Estate – Real Estate is great because it’s a useful asset (you can live in it), it accumulates value over time, and you can use it to provide passive income (i.e. rental income).
• Annuities – Annuities are life insurance products that guarantee you a certain amount of income for life. The amount of income depends on how much you invest in the annuity.
• Business – Business ownership typically grows over time, and then when you are ready, you can structure an exit strategy to sell your ownership stake in the business in return for passive income.
• Income oriented stock and bond portfolios – Investment portfolios that focus on income are another great way to accumulate value over time while also receiving passive income from stock dividends, bond income, or mutual fund dividends.

How do I acquire assets and passive income?

Assets are vital to wealth building, but the best ones require a lot of money up front. The three keys to building assets are to prioritize correctly, plan, and to look out for opportunities.

First, prioritize correctly. Which assets are the most important for you to acquire? Are all of your needs satisfied? If so, maybe you should start building toward a productive asset. Do you already have several productive assets? Maybe now is the time to save for a desire. Everyone prioritizes differently but use my chart above as guide.

Second, plan. You will not just magically be able to buy the assets we’ve discussed. You must develop a savings plan to acquire these assets. Do you want to buy property? You need to plan to get a reasonable down payment. Do you want to retire and get guaranteed income for life from an annuity? You need to plan to save enough to buy a large enough annuity to satisfy your income needs. If you are a business owner, you need a succession and continuity plan to make sure the value of your business is included in the net worth you eventually pass down to the next generation.

Third, you need to be on the lookout. Always look for potential opportunities. You never know when these will arise in your life, so always be wary. If you want to buy property, make sure you are monitoring your target market, and ready to act when a property goes on the market that’s way below your perceived value. Be prepared and financially literate. What would you do if you got an unexpected inheritance? Make sure you’re prepared to take advantage of that unexpected surprise, and equipped to make the right decisions for your family’s long term wealth.

When you buy an asset, you essentially have 2 payment options. You can either save for the asset, then buy it, or you can take out a loan to buy the asset, then pay the loan back over time. Both options can be effective in building wealth, but taking the loan route comes with more risk and less control. I suggest trying to take the savings route for the most important assets. The only time I would make an exception to this general rule is if the asset is a need. If you need a home to live in or a car to drive in, the loan route is the way to go unless you already have significant savings.

Final Thoughts

Building assets and passive income takes patience. Create your balance sheet and then try to increase your net worth by acquiring assets. Start with assets you need, then assets that are productive, then assets that you desire. Take it one asset at a time. If you prioritize correctly, plan, and look out for opportunities, you will build generational wealth over time.

This blog post is a rough draft for Chapter 7 of 10 for my Step-by-Step Guide for Building Generational Wealth. For now, each step will be in the form of a monthly blog post. I really hope to get your feedback and thoughts. After finishing the step-by-step guide, I plan to revisit each blog post, add detail, implement changes based off of your feedback and thoughts, and then publish the guide into a book. While creating a book is a daunting task, the impact that I think this book will have on my community continues to motivate me.