THE GROWTH VS INCOME DILEMMA
Why Focusing On The Wrong Thing
Could Be Costing You Your Wealth.
Growth and income from your assets are the two things that create your wealth and freedom. These two combined result in your royal rate of return - and as you know - the higher the return you get from your assets - the faster you get to freedom.
BUT - these two wealth generating elements of assets ARE NOT created equally - and this article and video is here to help you understand the difference.
Over and over people ask me… "Ann, show me how to get income generating assets so I can stop working actively and enjoy financial freedom."
While that is my goal for every person, it is VITAL that you do not rush to get income from your assets too soon.
⚠️ WARNING ⚠️
Focusing on income generating assets can significantly slow down your journey to freedom.
This video explains WHY. Watch it now and read the rest of the article.
Firstly, let's talk about assets.
These are things that can grow in value and generate income for you without you having to be involved in the value generating activity.
Growth, in this context, refers to the increase in the capital value of an asset. The price of the share increases, the price of the property goes up. The price of the crypto token you hold increases.
Short term price movements are often emotionally driven - but long term sustained price growth is because the underlying asset (business, property, collectable, crypto - etc) has increased in value.
Assets like businesses can grow in value if they innovate or expand their product lines. Properties can increase in value through renovations or changes in use. This growth means the thing you paid one price for is now with a higher price - you now have capital growth.
Assets can also generate income.
When a business makes a profit and they don’t have a highly leveraged way to utilise that extra profit to increase the value of the company more - they distribute these profits to their shareholders (i.e. everyone that owns a share in that company) as dividends.
When you rent out real estate you own - be it through a fractional ownership, a REIT, or directly - you get to keep the income after expenses and this is called Net Yield.
Income is fabulous. It brings liquidity into your portfolio so you can buy more assets and when you have reached your Freedom Net Worth, you can use this income to pay for your lifestyle.
But here's the catch with income.
Income tax is the highest form of tax in almost every country!
You see, when you generate income, you attract income tax.
And in most countries your asset generated income gets added to your self generated actively earned income and gets taxed at your highest marginal tax rate. AND you have to pay that tax within the tax year your assets earn that money.
OUCH!
So if you are a high income taxpayer and you are paying a high income tax rate of say 45%. You have to hand over 45% of your asset generated income to the tax man!
That means that money does NOT stay in your asset drawer. That income is NOT available for you to buy more assets with. It does NOT get reinvested. And your compounded return - which is what is going to create your wealth - is reduced significantly.
On the other hand - capital growth you get to keep. You only trigger a tax event on capital gains IF and WHEN you sell the assets. The value of the asset increases, you keep 100% of that increase, your continued rate of return gets to work on ALL the money your asset has made for you and your snowball to your wealthy life accelerates.
It is crucial to assess where you are on your journey to financial freedom.
If you're in the growth phase, focus on increasing the capital value of your assets rather than trying to generate income from your assets and where your assets do generate income find ways to limit your tax liability on those income returns.
Read this article on your Different Investments Accounts - Tax Deferred, Tax Free and Discretionary to understand how to reduce your tax on the income your assets generate so you get a higher return and achieve your freedom goal faster.
When you're ready to start living off your assets, you can transition some into income-generating assets. Again, it's essential to do this in a tax-efficient manner so you don’t end up losing huge chunks to the tax man.
If you have assets that provide both growth and income or predominantly generate income, remember the cardinal rule of being a Wealth Chef
Reinvest your Assets' Returns
Reinvest dividends and rental income into acquiring more assets that grow in value. This strategy will accelerate your financial freedom.
Don't be tempted to consume income too soon, as this will also stunt the growth of your assets.
Think of your assets as trees; you need them to grow and bear fruit before you start feasting on the harvest.
Keep planting and reinvesting to create a thriving orchard of high-value assets.
Remember, your financial freedom journey is a marathon, not a sprint.
Understand the role of growth and income in your wealth creation, and let your assets work hard to support your wealth-building goals.
Until next time,
Big love
Ann
