Here is the secret to wealth – Buy Assets and Avoid Liabilities. I think the first time this became clear to me was when I read Rich Dad Poor Dad by Robert Kiyosaki. That’s an easy to read book with a strong message and it should be on everyone’s reading list. Check your library if you haven’t read this yet. He has his faults, but I think he helped many people break out of the endless cycle of consumerism. (Don’t go to the seminars, they are pretty sketchy from what I read.) Anyway, what are assets and liabilities?
Assets and Liabilites
Kiyosaki defines ‘asset’ a little bit differently than your usual financial experts. To him, an asset should generates positive cash flow for you. Anything that takes money out of your pocket is a liability. Almost everyone else includes everything in your net worth in the asset column. This was quite a revelation to me and it’s a great way to think about how to spend money. It taught me not to rely on earned income (from a job) and to focus more on investment income instead. Let’s go over some items.
I’m sure you’ve heard that your home is your biggest asset. Is this really true? When you buy a house, you’ll have to pay mortgage, property tax, HOA, insurance, utilities, repair and maintenance, yard work, not to mention having to furnish it. That’s a lot of money going out of your pocket every month. Sure, the house can appreciate, but would the appreciation be enough to surpass all the expenses? We all need a place to live and a house is great, but it’s not really an asset.
A house is good because it forces people to save. A portion of the mortgage payment goes to the principal and you’ll get that back when you sell. Appreciation is nice, but it’s not much more than inflation in the long haul.
There is one way to generate some money from your house – rent out the extra rooms! Not many people are willing to do that, though. It’s best to buy the right size house for your family. Don’t get something more than you really need. It would be better to spend the money on income generating assets instead.
For many people, their car is the 2nd most valuable thing they own (next to the house). A car is a necessity to most people and it can cost a lot of money. However, it’s not an asset. It’s even worse than your house because the value depreciates every day. A car is basically a money pit. How much money do you spend on your car every month? Can you imagine investing that money instead?
Most of us need a car to go work and run errands. It’s an unavoidable expense for most of us. However, I don’t think anyone should buy a luxury car unless they are already wealthy.
Everything else you own
Pretty much everything you own is sitting around depreciating. Furniture, TV, gadgets, kitchenware, clothes, and everything around you are bleeding money. It’s kind of funny way to look at your possessions. You can see dollars signs floating away from everything you own. Does this give pause before you buy the next gadget on sale this coming Black Friday? Maybe it’d be better to just kick back and take it easy at home instead.
Let’s look at it from another angle
- Good – Income producing assets such as stocks, rental properties, promissory notes, and bonds.
- Neutral – Appreciating assets such as your home, gold, artwork, antiques, and collectibles. I’d say these are neutral because you never know if the appreciation will beat inflation and the cost of upkeep.
- Liabilities – Depreciating assets like your TV, furniture, and other personal properties. These things are just sitting around leaking money.
- Worse Liabilities – Income consuming assets like your car and cell phone. These things need a monthly cash infusion to stay functional.
Of course, most of us need our car and cell phone to function in the 21st century. It’s natural to have more liabilities than good assets when you’re starting out, but you need to accumulate good assets to become wealthy.
Where are you on this table?
- Poor – Own mostly liabilities and need to keep working to feed your lifestyle.
- Middle class – Have been investing for a while and own some good assets. I’d say once the value of your good assets surpasses 50% of your net worth, then you’re firmly in this class.
- Financial Independence – Income from good assets surpass your expense.
- Wealthy – Having plenty of income from your investment to keep reinvesting. Wealth can be passed on to the next generation.
Most of us start off poor and the progression to the next level is slow. The poor keep spending money on things they don’t really need. The middle class doesn’t invest enough so they are stuck there for decades. It makes sense that the rich get richer. It’s because they reinvest and make more money than they consume.
What about you? Where are you on this table and where will you be in 10 years? Are you accumulating assets or liabilities?
Comment from Charles @ Get A Rich Life
Rich Dad Poor Dad was one of the two most influential books I read. It’s too bad he’s a snake oil salesman, he got greedy. His seminars are useless and preys on people who can least afford it. He could have been a beloved personal finance guy, what a shame.
RB40> I never fell for the seminars. I guess it’s best to just read his first book and then move on. Or just search around YouTube for his talks.
Bonus video from YouTube
Photo credit: flickr rwcox123