Annuities

An annuity is a series of payments made at regular intervals. Annuities can be viewed as an asset or a liability. When you’re making monthly payments on your mortgage the annuity becomes a liability. When you receive rental income every month this annuity becomes an asset.

Annuities can be fixed term or infinite. For example a loan repayment is usually for a certain number of years. Salary is a form of annuity which lasts for as long as you have a valid employment contract. On the other hand you can earn rental income from your rentals for a very long time. 

The value of an annuity depends on the value of the underlying asset or liability. The amount of interest income you earn will depend on the value of the principal invested. Your mortgage repayments depend on the amount borrowed. Your employment income depends on your skills and experience. Your business income will depend on how valuable your business is.

The easiest way to create an annuity asset is to convert a lump sum amount of time or money into a series of future payments. For example when you lend someone money you create an annuity asset if you expect a series of monthly repayments for a certain period of time. When you go to University for five years to get a specialty degree you create an annuity asset from future salary payments. When you invest in rentals you create an annuity asset.

Becoming rich is a matter of creating multiple annuity assets. It’s better if these annuities bring cash into your pocket, are infinite, and don’t require too much supervision. If set up well, these annuity assets will continue to pay you into the future.