To achieve financial freedom, you must understand and utilize compounding to your advantage. Robert Kiyosaki taught about compounding in his book, “Who Took My Money?” In this book he wrote:
“As a professional investor, I want to…
1. Invest my money into an asset.
2. Get my money back.
3. Keep control of the asset.
4. Move my money into a new asset.
5. Get my money back.
6. Repeat the process.”
This process he shared IS compounding in its most basic form. Investing should be about buying income, not appreciation. The reason why investing should be about income is because you can compound income by reinvesting into additional income paying assets.
Once you have your first income producing asset, you simply reinvest this income into a 2nd income producing asset. This second income producing asset was acquired without your money. It was paid for by asset number 1. Now you’ll have two income producing assets sending you money. You can reinvest this income into income producing asset number 3. Asset number 3 was purchased without your money. It was paid for by income producing assets number 1 and 2.
This process of compounding your income is magical over time.
Over on TheConservativeIncomeInvestor.com, Tim McAleenan wrote:
“A potential lesson from Warren Buffett’s life is that it is important to own something outright that gives you money to invest. It’s one thing to be saving $500 per month and putting it into blue-chip stocks. That’s very nice, and it builds wealth. But if your ambition is to use blue-chip stocks as part of a strategy to get really rich, then you need to have an asset under your belt that gives you lots of regular income to deploy. Imagine someone owning a $3 million apartment complex that spins off $300,000 in annual income. If you owned an asset like that, you’d have life made. You could enroll in the DRIP program of your 15 favorite stocks, and have $1,000 invested into them every month. Wealth starts to get built very, very quickly when you have a primary cash-generating asset that gives you regular money to invest.”
As Tim has shared, Buffett used this same process to build his wealth. He acquired an income producing asset and then used the income producing asset to acquire additional income producing assets. Buffett’s company Berkshire Hathaway owns numerous income producing assets. Here’s a snapshot of the income producing assets owned by Buffett’s company from their website:
Buffett’s company owns over 50 income producing investments. These investments do not include shares of blue chip stocks held as investments. All of these various income producing assets send money to Berkshire Hathaway each year. Buffett uses this income to acquire new income producing assets and this process continues each and every year. This is how he built his wealth.
It all started with his first income producing asset.
Do whatever you can to get ownership of your first income producing asset.