You have learnt that once expenses are spent, they cannot go back to assets (balance sheet). Once it is gone, it can never come back. If it does, it will be a minimum.
The ultra-rich with their cash overflow knows what to do with them. They would invest in startups, young companies with good potentials, promising stocks, precious metals, commodities, real estate. All these with the help of a team of good investment advisors. If the investment turns out bad, they can use a capital loss against capital gain on their tax return. These are what we call "assets".
For many people, investing in assets like the ultra-rich is a distant dream. Most do not know where to start. However, there is a saying, when there is a will there is a way. So, what is the best way to have what the ultra-rich have? It is called managed assets or mutual funds. Mutual funds are managed funds by equity professionals led by the fund managers on investors' behalf. Yearly management fees charged is a token compared with what you can get from your investment returns. Small investors can invest as little as $50 per month. There are various industries from medium to high risk to choose from. National and international exposure. Choose a financial planner for help.
For small investors with more cash, I think they should invest in real estate. You want to have your own home first before exploring in order not to spread too thin. Since 2001, real estate has slowly been creeping up in urban many cities around North America. Historically, when the interest rates decrease urban housing prices increase. For example in Surrey, BC real estate has more than doubled and depending on where and what type of real estate, it tripled since the financial crisis of 2008.
The next big-ticket item that we all must face is the motor vehicles we use for our lifestyle. To lease or to purchase? We all know that motor vehicles will depreciate. On average, a 4-year-old car will depreciate by 40%. Suppose you purchase a Lexus @ $50K. 4 years later, you offer to trade in your car for a newer one. The car dealership will likely offer 40% or $20K for the trade-in that has a market value of $30K (40% depreciation). The car dealership makes $10K. Most people will take the trade-in because it is convenient. To me, if you are going to trade in your 4-year-old car it is better to just lease the motor vehicle from a cash flow point of view. You will have an option to purchase the lease motor vehicle at $20K anyway.
Lastly, on the motor vehicles, choose one that has high resale value after the lease ends. Cars like Lexus, Toyota, Honda, Hummer and some American-made jeep, have high resale value. Should you buy out your lease, you can still make a little profit after paying sales taxes. To view the resale value of the motor vehicle, go to autotrader.ca How? You filter 4-year-old make and model. You will have a sense of how much it is worth in the next 4 years.
Building assets is not coveteousness. It is building the future and staying ahead of inflation.
Stay tuned for part 7.