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Income generating Assets
Owning assets is of little significance if you do not make them work to generate income. To maximise returns, you should invest in the management of your assets
We shall discuss assets and income.
On a recent holiday, I stayed at a beautiful home amidst coffee estates, where a family of techie parents was also holidaying. Let us call the planter who owned the 80 acres of estate, Vijay, and the techie, Ajay. Ajay was not very impressed with the life of the coffee estate planter. He felt that being tied to a remote land so far from the rest of the world would be boring. Ajay's lifestyle seemed enviable. Conversations centred on property, prices, lifestyle, children and retirement, as is wont to happen to 40-year-olds. Whose life was better and why?
Vijay inherited the 100-year-old estate from his father, a family of planters for generations. After a 20-year stint as an engineer, he returned to help his ageing father, and stayed back to handle the family's business. Ajay was a first-generation techie in his traditional Tamil brahmin family and had lived abroad for 20 years. He had returned to India few years ago, taken in by the stories of opportunities here. Vijay's primary asset was land; Ajay's was human capital. How they treated these assets is the crux of the story.
Vijay valued his estate at about `25 crore. Ajay scoffed at the number. He spoke about businesses set up by the new entrepreneurs valued at a much higher sum. He had just quit his job to set up his own business, and was looking at `100 crore as the value he would realise in three to five years. Vijay seemed suitably impressed, but could not help asking how much of his own capital would Ajay put in. Ajay has a large house in a gated community in Bangalore, where his family lives, and he has two teenaged children. He also had another house in Chennai, where his parents live. He had farmlands in Bangalore and Chennai, and has booked another flat in Bangalore. He valued his current assets at about `50 crore, but was investing only `20 lakh in his business, the severance package he got from his last employer.
Vijay's expertise in his business was remarkable. He tracked international coffee prices; he knew how much it rained in Brazil and, therefore, the likely crop outputs, and he managed his workmen excellently. He generated a comfortable profit from his estate. There was additional income from the homestay that was managed by his wife. He also held property outside the estate that was fetching rent, and financial investments that paid interest and dividend.
Ajay was a disillusioned professional, unable to come to terms with the work culture in India. He wanted to be his own boss after a few bad experiences. Ajay's wife had quit her job when the children were young and is undecided about going back to work. Their investments are in tax-saving insurance, equity and deposits, but the bulk of it is in land and property. Having been a busy professional, Ajay does not have much interest in managing money.
Who is doing better? The planter or the techie? Despite Ajay's confidence and disdain for the boring life of the planter, Vijay is miles ahead and financially secure. Why? First, Vijay generates a steady income from his assets and is unlikely to sell his estate in his lifetime. This was a point Ajay made very often, that the estate would be a dead investment. However, Vijay understands that it can be productively utilised. He has acquired expertise in managing the asset and ensuring that it earns well for him.
Ajay's assets, on the other hand, earn nothing for him, and in his current state of joblessness, his human asset is also idle.
Second, Vijay manages risk better. He knows that the income from the estate can be subject to risks of the coffee market. Not only does he track it, but he has also insulated himself. By creating additional income from the homestay, rent and investment income, Vijay can manage a few bad years easily. Ajay is exposing the single most important asset he has to business risk. The family's future depends on how successful Ajay's business turns out. He has a productive human asset in his wife, remaining unutilised by choice. Her income could be the buffer the family needs when Ajay sets out to become an entrepreneur.
Third, Vijay operates from a position of expertise; Ajay's business is being set up due to his failure to adapt in India. Vijay knows that he should generate higher income from his core asset. He, therefore, invests in expertise and is hands on. Ajay is overconfident about his core asset and has traded regular income for future capital appreciation. If the bet pays off, Ajay will be wealthier, but he is venturing into business leaning so much on external factors that his income will remain risky.
Ajay was convinced that he was better off compared to Vijay. Many of us live under the same illusion. We overlook the wisdom of people like Vijay, who align their life, expertise, income and future to their assets. Such an approach helps in managing risks better. Instead, we approach life like Ajay. We are happy with scattered residential property that earns too little income; we hold too many investments without tracking them well; we focus too much on the current job without investing in enhancing the quality of the human asset on which we are so dependent; we do not explore the need for additional secure income to protect us during bad times.
How we work with our assets and the incomes they generate critically determine how secure our financial lives will be. What are the lessons?
One, owning assets means little if these are not made to work hard to generate income. Two, the assets that are core, huge, and not intended to be sold, should be in prime shape and not remain idle. Three, investing in expertise in managing assets is important to make the most out of them. Four, assets should be diverse in terms of their nature, location, and productivity, so that the risks are lower. Five, one is not wealthy based on the asset that one owns, but on the basis of how he manages those assets. Before blindly accumulating assets, pause to consider: how you will get them to work for you and your future?
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