Warren Buffett, CEO of the Berkshire Hathaway and one of the most successful investors in the world, said, “The best investment you could ever do is to educate yourself.” Let us begin becoming financially literate by understanding these 3 basic principles:
1. What is an investment?
As explained by www.investopedia.com in its very economic sense, “An investment is any purchased good that is not consumed today but will be used in the future to build wealth.” This definition implies that it starts with an intended delayed gratification. An investment is best used to produce passive income while you earn aggressively. Finding a product that will allow regrowth of the capital you bought it with is the key.
2. What is the difference between passive income and aggressive income?
In his book “Rich Dad Poor Dad”, Robert Kiyosaki shared the importance of passive income over active income. To embrace the advantage of the first one over the other, he pointed out that active income is what you earn from your day job. Passive income is called so since you get it without doing much of a workload. Having an investment to earn you some passive income is the name of the game. You will get paid via the ‘investment’ you have made.
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| Sample financial statement that the boardgame Cashflow provides. |
For example, you have bought an apartment and had it rented out. Basically, the monthly rental payment you get from it is passive income because you did not actually have to do any work for it compared to your 8-hour day job. Simply put, you did not have to report for duty to anybody at anytime. You are earning money even when your attention is on other things. The capital you bought and renovated the apartment with was your investment and this can earn you back your capital and more! Understanding the rate of return based on how an apartment is in demand, you are actually making your investment work for you. This way, your apartment becomes an asset.