Thinking in equity versus income

Thinking in equity versus income is a subject that is increasingly occupying my mind - perhaps as I'm getting older(!).

Equity v Income

When I say 'Equity', I am referring to our asset base or net worth. Those assets that we have accumulated and that we control - and that provide income and capital appreciation.

Equity provides a longer-term and more sustainable view of our financial position.

Whereas most folks tend to think in terms of 'income':

"How much do you earn per month/year"?

A six-seven monthly or annual income figure can attract gasps of wonder, but this income level means nothing if it can be turned off in a moment...

Income in isolation should not be viewed as a gauge of success (without first investigating the source of that income...clue: is the income derived from their own assets...?)

The problem with thinking only in terms of income is that, if an income source is stopped, then we may be left with nothing further to draw on.

This is how most people approach their lives - relying on a monthly paycheck from a job!

Their only asset is in their eyes is their 'job'. But they don't control their job - it is controlled by their employer - so this is not a true asset.

Building your asset base

By building your asset base, this could provide a more diverse and varied range of income sources. So if one income source was to dry up (e.g. you get fired or laid-off from your job), another asset could step in and fill the income gap.

Assets can take many different forms, for example, property that is let out to tenants (who pay you rent) through to stocks and shares (that pay you dividends) and even books or other creative works that provide a royalty/licence income stream. And of course, for many entrepreneurs, their core asset will be the business(es) that they build.

Thinking long term v short-term

The drawback for many people in seeking to apply a more equity-focused mindset is that it requires a longer timeframe. Meanwhile, the majority of folk are absorbed in finding ways to cover their (never-ending) monthly expenses - this means that their focus falls to their short-term income needs.

So days turn into weeks; weeks into months and months into years, and then people look back and realise that their asset base is scarce. They have fallen into the trap of focusing on short-term income needs and so have little to show for it.

Some might say that it is easy for others to talk about building asset-bases, but it is much more difficult when you're deep in the trenches trying to cover monthly expense needs, and this is true.

However, all of us can find some spare change that can be put towards building our asset base - little-by-little and step-by-step.

And then, we will look back and see how our assets compounded over time. Because we took those simple steps in devoting (even small amounts of) income toward building our asset-base.

Looking forward - thinking differently

So as we approach the end of this year and start planning for the year(s) ahead, perhaps we should think more in terms of building equity assets over the longer term and less about short-term income drivers (unless of course that income driver is derived from an underlying asset that you own or control).

It is about making decisions and daily actions on the basis of the longer-term perspective in building our asset-base. Building our equity. Even if the impact of these actions might lead to a cut in our income in the shorter term. So long as the longer-term effect is a growth in our equity.

What do you think?