≡ Menu

Secret to Building Wealth – Buy Assets, Avoid Liabilities

{ 100 comments }

The Secret to Building WealthHere is the secret to wealth – Buy Assets and Avoid Liabilities. The first time this became clear to me was when I read Rich Dad Poor Dad by Robert Kiyosaki. The book is an easy read, but it has many flaws*. If you haven’t read it yet, I encourage you to check it out from the library and give it a quick once over. However, you need to take the book with a grain of salt and don’t blindly follow it 100%. You’ll have to separate the wheat from the chaff. The biggest takeaway I got from Rich Dad Poor Dad is how to differentiate between assets and liabilities. Turns out, I had it wrong for years. Once I figured that out, building wealth became much smoother. It makes a lot more sense to accumulate assets and avoid liabilities.

* There are many problems with Rich Dad Poor Dad. Mr. Kiyosaki is a great motivational speaker and salesman. That’s how he made his fortune. His books are designed to sell more books, courses, and seminars. Don’t fall for the seminars! They are too expensive. You can learn a lot more for free on the internet and the library. I recommend reading The Millionaire Next Door and Your Money Or Your Life before Rich Dad.

Assets and Liabilities

I used to think assets meant anything that has a cash value. However, that’s not quite the right way to look at it. If you want to become wealthy, you need to think of your household finance as a business. An asset is something that, in the future, can generate cash flow for you. Assets make money. Anything that takes money out of your pocket is a liability.

This was a revelation to me. I used to include our home, car, piano, and other personal belonging in the asset column. That’s the wrong way to look at it. All these things are really liabilities. It changes how I think about spending. In my 20s, I felt fine when I purchased our BMW convertible because I thought it was an asset. Now I know that it’s a liability and that’s why I’ll never buy another luxury car as long as I’m building wealth. Once you think about assets and liabilities this way, it is much easier to build passive income.

Let’s go over a few “assets.”

House

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 the mortgage, property tax, HOA, insurance, utilities, repair and maintenance, yard work, and furnish it. That’s a lot of $$$ going out of your pocket every month. Sure, the house can appreciate, but would the appreciation be enough to surpass all the expenses? It doesn’t always work out like that. We all need a place to live and a house is great, but it isn’t 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 usually isn’t much more than inflation in the long haul.

There is one way to generate some money from your house – rent out the extra rooms! We used to rent out the extra room at our old home to new engineers. This worked out great. They were never home and the rent helped pay our mortgage. Renting out an extra room is even more lucrative today with Airbnb. Lots of people are making extra money with it. This really depends on your personal situation, though. Most people value their privacy too much to rent out the extra room.

Car

For many people, their car is the second most valuable thing they own (next to the house). A car is a necessity to most people and it costs a lot of money. However, it’s not an asset. It’s even worse than your house because a car depreciates every day and you also need to buy gas. 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 to work and run errands. It’s an unavoidable expense for many of us. However, I don’t think anyone should buy a luxury car unless they are already wealthy. I’ll buy another convertible someday, but it can wait until I’m rich.

Everything else you own

Pretty much everything you own is sitting around depreciating. Furniture, TV, laptop, tablet, kitchenware, clothes, and everything around you are losing value as you read this. It’s a funny way to look at your possessions. I can see dollars signs floating away from everything I own. Does this give you 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 another way

  1. Good assets– Income producing assets such as stocks, rental properties, real estate crowdfunding projects, bonds, and a business.
  2. Neutral assets – 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.
  3. Liabilities– Depreciating assets like your TV, furniture, and other personal properties. These things are just sitting around leaking money.
  4. Worse Liabilities– Income consuming assets like your boat, 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 okay 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 wealth scale?

This is a scale I made up. It’s a bit different than how we normally think about wealth. We usually think wealthy people live in a big house, drive a luxury car, and belong to an exclusive country club. However, are you really wealthy if you spend all your income every month? Wealth isn’t how much you spend; it is how much you keep.

  • Poor – You’re poor if you have a lot of liabilities and need to keep working to feed your lifestyle. People can be poor even if they make a great income.
  • Middle class – You have been investing for a while and own some good assets. If the value of your good assets is more than 50% of your net worth, then you’re firmly in this class.
  • Financial Independence – This should be the goal for everyone. Once the income from good assets, aka passive income, surpasses your expense, you can retire and live life the way you want.
  • Wealthy – This is beyond financial independence. You have plenty of income from your investment to keep reinvesting. This way your wealth will keep growing and you can pass it on to the next generation.

Most of us start off poor and the progression to the next level is very slow. The American consumerism culture encourages everyone to spend money on things they don’t really need. It’s not easy to put your hard earned money into good assets when you don’t understand the difference between assets and liabilities.

On the other hand, the rich get richer. They know it’s important to invest and generate passive income. The rich don’t depend on earned income to fund their lifestyle. They use investment income to buy their luxuries.

What about you? Where are you on this scale and where will you be in 10 years? Are you accumulating assets or liabilities?

*This article was originally written in 2013. I revised and updated it to reflect my current thinking.

DIY investors,

If you need help keeping track of your finances, try using Personal Capital to manage your investment accounts. We have many accounts and Personal Capital helps us see the big picture quickly. Also, I’m a huge fan of their awesome retirement calculator. You can read my review here – The Best Free Retirement Calculator. I highly recommend Personal Capital.

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.

Latest posts by retirebyforty (see all)

Get update via email:
Sign up to receive new articles via email
We hate spam just as much as you
{ 100 comments… add one }
  • Fi Fighter November 22, 2013, 12:46 am

    Great summary Joe. Spending your money on assets as opposed to liabilities is really the “secret” to building wealth.

    Sorry, it isn’t any more exciting or glamorous than that. Right now, all my earned income goes straight into buying more assets. I’m on a mission — an arms race to acquire as many assets as possible in the shortest amount of time with the least amount of my own capital.

    THe sooner you can do that, the sooner you’ll be financially free. Investing isn’t rocket science. Right now, my assets, or cash flow pays for all of my monthly expenses. It works. The proof is in the pudding.

    • The Don November 22, 2013, 9:10 am

      Fi Fighter, curious, but what are some of the assets you’re buying. Stocks, properties, bonds?

      • FI Fighter November 22, 2013, 12:19 pm

        Don,

        Right now my primary focus is on rental property. However, I did start off with dividend investing, and that’s something I still want to continue later.

        Long term, I want to get into commercial real estate.

    • retirebyforty November 22, 2013, 9:53 am

      Yeah, it’s slow going when you’re in the poor to middle class. You just need to keep your head down and keep investing. Great job with your cash flow. You got to FI then!

      • FI Fighter November 22, 2013, 12:21 pm

        Joe,

        Pretty close to getting to FI. On a good month, it’s right about there. I’m pretty conservative though, so need a wide safety margin before feeling comfortable enough to call it quits for good.

        Hope to join you in early FI soon enough! 🙂

    • MyFiIntheSky March 5, 2017, 10:14 am

      Great summary! It’s shocking how many people think that their house is an asset. Sure, it’s not as bad as some purchases–at least it probably won’t depreciate in value–but it won’t build passive income. My strategy is to always earn money twice. The first time is the hard way (with good old fashioned work), and after I use that money to buy an asset, I’ll earn money a second (and third, and fourth) time without doing any work. It’s the only way to live like the rich! (I just wrote an article on my website, which brought me here to see what others were saying about this topic, if anyone is interested.)

  • Pretired Nick November 22, 2013, 4:15 am

    Kiyosaki was probably my biggest influence early-on as well. The missing piece that I didn’t really get at the time was putting frugality to work for me (fortunately I was always relatively frugal). The book largely talks about investing and the big picture, but it didn’t make clear to me how much the mindless spending (eating out, buying toys, etc.) would affect the outcome.
    I like how you broke out liabilities from “worse liabilities”. I feel exactly that way but have never seen that in writing before. Well said!

    • retirebyforty November 22, 2013, 9:56 am

      It’s a great intro to personal finance. I forgot most of it, but it made a good impression back then.

  • Daddy Domestic November 22, 2013, 4:36 am

    Kiyosaki is just a salesman, but the Assets vs Liabilities concept you outlined above is pure gold. Before I read his book, I had never thought about it……but like all great concepts it: 1)was simple and 2)made perfect sense. I also like how you broke down liabilities into better and worse. Nice move.
    -Bryan

    • retirebyforty November 22, 2013, 9:57 am

      I guess it’s best to just read the first book and then move on. Thanks for the compliment.

  • [email protected] November 22, 2013, 4:45 am

    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’ve been a beloved personal finance guy, what a shame.

    • retirebyforty November 22, 2013, 9:57 am

      His seminars are quite expensive. Do you get anything more than from his books? Probably not…

  • The Warrior November 22, 2013, 5:04 am

    It’s sad that I have known this since I was probably 18, but I have taken very little action to make it a reality until the last few years.

    Overcoming the consumerism mentality is tough when buying assets is so long term. No excuse, but the reality.

    Now, my wife and I are striving towards as many assets as possible. It’s starting with eliminating the liabilities which we are close to doing besides the home mortgage and moving on towards building retirement accounts. After that, I want to work into real estate but that’s more of a 5-10 year goal at this point.

    Great suggestion of what to focus on today Joe

    The Warrior
    NetWorthWarrior.com

    • retirebyforty November 22, 2013, 9:58 am

      Thanks! At least you are now on the right path. It’s never too late, right?

    • tim September 5, 2014, 7:51 am

      How about buying assets that help you eliminate your liabilities? Instead of being so focused on your bottom line, focus on your top line to shrink it.

  • [email protected] November 22, 2013, 5:20 am

    I would like to think I’m building up assets, not liabilities! And I keep saving and spending a lot less than we earn. That’s all we can do, I suppose!

    • retirebyforty November 22, 2013, 9:59 am

      Just keep investing and you’ll be wealthy in a while. 🙂 Great job so far though.

  • Justin @ RootofGood November 22, 2013, 5:45 am

    From a very abstract level, Kiyosaki has some solid wisdom to share in his books. And what you included in this article is about as far as that wisdom extends (so save yourself $4.95 on the paperback edition and just reread this article!).

    What he misses in the pursuit of “cash flow” is the very real and tangible benefits of a regular 9 to 5 W-2 job. A regular paycheck with benefits and retirement savings options (and often matching contributions). I still think a regular day job is a very easy low risk method of getting wealthy in a relatively short period of time. You’ll never be stinking rich like an entrepreneur. But a steady paycheck and spending well below your means will lead to slow but perpetual growth in wealth over time.

    I love how you break out assets and liabilities in descending order of “goodness”. It’s really important that people focus the most effort on accumulating assets that produce generally high returns (like stocks) and less on assets (in the non-Kiyosaki sense) that might end up costing you money but also provide usefulness (like a house). I often see the 20- or 30-something mindset of “let’s buy all the house we can afford because it’s a great investment”. When in reality, you could save $1000 per month by buying the house that you need, and divert the savings into an investment account and reach FI so much sooner. Or use the money to buy an even larger house down the road (spatially and temporally speaking).

    • retirebyforty November 22, 2013, 10:02 am

      I think his first book was quite entertaining. It’s a fast read anyway. I’d still recommend it for beginners, but avoid the seminars and just ignore what he says about network marketing.
      Being an entrepreneur is risky, but I think it’s way better than working to enrich someone else. A job is great when you start out, but most people rarely get rich working for someone else.

      • Dana B July 7, 2015, 6:53 am

        I agree with everything that you’ve said, except for the part about ignoring what he says about network marketing. Network marketing can be great depending on what company you get into and how much effort you’re willing to put into it, and also if you learn how to work it properly. I’m 21 and am already in a network marketing company (won’t say which one) and plan on making decent money within a few years (note of saying decent, not filthy rich). But I’m not putting all of my eggs into that one basket. I am also starting to look into investing and obtaining assets so that I have other sorts of income. While doing all of this, I am planning on staying with my 9-5 for a few more years until I feel that I have truly obtained financial freedom. Then I will continue to invest and obtain assets.

        • retirebyforty July 7, 2015, 10:11 am

          Okay, thanks for your perspective. I haven’t tried network marketing so I don’t know much about it. If you’re good at it, then keep going. Good luck!

  • Jane Savers @ Solving The Money Puzzle November 22, 2013, 6:17 am

    According to the table I am poor. I have never counted my house or possessions as part of my net worth. My net worth is a negative number and I just financed a new-to-me car so now I am even poorer today than I was yesterday.

    Today I was able to purchase 52 shares of a dividend paying Vanguard ETF. One day my net worth will not be a negative number and I will be able to move to middle class.

    $24,000 in debt and almost $10,000 in assets. A long way to go before I stop being poor.

    • retirebyforty November 22, 2013, 10:02 am

      You just have to keep your head up and keep going. Good luck!

  • Jamie V November 22, 2013, 6:19 am

    I don’t think I’ve yet read that book but the concepts all make perfect sense. Starting out, I have (in order of amount) Worse liabilities (car + cell phone), liabilities (TV, furniture, other crap), then neutral (collectibles). I’m hoping to dip a toe into the “Good” category in 2014 though and I’m so excited! Moving on up from Poor to Middle Class will be a nice change. I’m looking forward to having a positive net worth at some point.

    • retirebyforty November 22, 2013, 10:04 am

      Check your library. It’s a fast read. Good luck next year. There will be ups and downs, but you’ll learn a lot.

  • bill November 22, 2013, 6:28 am

    Was worried when I saw you mention Kiyosaki. What a scammer. But you are
    correct on all other points.

    • retirebyforty November 22, 2013, 10:05 am

      I need to do more research into his scams. I have a pretty opinion of him, but it’s because I only read his book.

  • Chris November 22, 2013, 7:33 am

    I love that you’re getting into the nitty-gritty of breaking down “assets” further. I wholly agree that some assets are actually money sinks and I don’t include them in my net worth calculations: like our cars. The reality is they take money to keep up and are an ongoing expense – and we plan to drive them until they’re worthless.
    I think that (non-investment, primary) homes live in a sort of grey area. Obviously you get the utility of living there, but they also require active maintenance and monthly payments. For most people, I’d say that a home almost acts like a sort of poorly performing forced savings account. You don’t appreciate any gains until you sell it, and the depreciation/maintenance/upkeep probably negates that (plus the cost of real estate transactions take 6%+ off the top anyways). But everyone requires a place to live, and rent just rolls the payments altogether plus a margin for the owner. You’re trading money for time (avoiding maintenance yourself) and flexibility to move.

    • retirebyforty November 22, 2013, 10:07 am

      Yeah, a home isn’t a good investment unless you’re really lucky and purchased at the bottom of the market.
      I think it’s still nicer than renting though. 🙂

    • Anon November 22, 2013, 2:25 pm

      I’ve been thinking about this one a lot lately as mortgage rates rise. I live in a high housing cost area (CA) but rents are still $1,000/month lower than what I can purchase for once I include property taxes and HOAs. They are also building a lot of new buildings so I’m expecting rents to stay flat or even drop in the short term. Once you add closing costs and a good-sized down payment that is a lot of cash. I am making 10-15% in most of my investment accounts so I can’t justify the numbers – even with having to pay rent. If the numbers were closer to the rental market I could possibly think about it as a guarantee of my housing expense as I expect real estate to continue to appreciate long term. I can’t justify it though if I can’t make renting numbers work before adding things like maintenance in there. I’m not comfortable trying to purchase rentals in the rural areas that are within a reasonable drive where land is cheaper because the housing market isn’t stable there. So it looks like I can’t diversify as much as I would like.

      • retirebyforty November 24, 2013, 5:36 pm

        It’s good that the rent is staying flat. 10-15% gain is great. I don’t think real estate can beat that unless you really leverage the heck out of the properties.

  • [email protected] November 22, 2013, 7:38 am

    I read Kiyosaki’s book and it was exciting and inspiring. While the concept of owning assets rather than liability was good, a lot of the concepts he writes about are too general and vague. P.S: Just read your article on US New and World Report: The Fast Track to Retirement. Thought it was excellent!

    • retirebyforty November 22, 2013, 10:07 am

      I probably have to go back and reread the book again at some point. It’s a good intro to personal finance book.
      Thanks!

  • SavvyFinancialLatina November 22, 2013, 9:57 am

    We are in the process of buying an affordable home compared to our income. Sometimes I wonder how people can afford more. I see colleagues buying homes 2x as expensive, and wonder if they are getting paid more than me???How else can they afford new house, new furniture, new car?

  • davidmichael November 22, 2013, 10:03 am

    Another good blog article Joe. What I like in reading several financial blogs showing how people can retire at an early age is a focus on the topic from an average person mindset. It’s so refreshing to see the possibilities and eventual outcomes of our financial behavior. I like how you break it down into its simple components. Great work!

    I must say that I made a huge financial mistake by building a dream house close to our retirement age (3000 sq ft). In fact I had planned to work another ten years to complete our Profit-Sharing Plan in my company that would have resulted in over a million dollars in one of our money buckets. But…cancer changed all of that. Survived the cancer over 20 years ago, but never quite made up for the loss in income upon forced retirement after the company sale. Once my wife lost her annuity due to an insurance company bankruptcy, we realized our mistake of not paying for our new home with cash, which we could have done at the time. So, in hindsight, we should have built a small home (1200 sq ft max) for retirement and payed for it by cash and invested the difference. Another reason to focus on diversification and treat a house as a liability. Such is life!

  • Mr. Roboto November 22, 2013, 12:01 pm

    I have read the “Rich Dad, Poor Dad” book, and I agree, it has a strong message. A little bit of it was lost on me when I discovered it wasn’t true, but I guess that is my own fault for believing it was. I still agree that as a metaphor for consumption and breaking the cycle of debt and consumerism.

    My Wife and I purchased a fixer-upper home from HUD, with about as much square footage as we used to have in our studio apartment, and I couldn’t be happier. The mortgage is smaller, utilities are smaller, and we are forced to consume less. I highly recommend it!

  • EL @ MoneyWatch101 November 22, 2013, 3:27 pm

    Great post Joe, I did a similar one about Assets vs. Liabilities, many people still do not understand the concept behind purchasing a car and or purchasing a stock. They see buying a car as less risky and a thing that can improve their net worth. Which is the wrong way to think because the stock puts money in your pocket and a car takes away.

  • krantcents November 22, 2013, 4:38 pm

    Most income generating assets usually have some debt associated with it. A rental usually needs a mortgage. It is okay to have a mortgage if the loan to value (LTV) is no more than 80%. In some cases lower to create a positive cash flow. A mortgage is a great device at a low interest rate to leverage your down payment.

  • Derek November 22, 2013, 5:50 pm

    I just finished Rich Dad Poor Dad.
    Highly recommended.

    Thanks for this post!

    -Derek

  • Micro November 23, 2013, 7:11 am

    I always liked his analysis about a house not being an asset. There are costs and maintanence associated with it but to me there is another important factor. You have to live somewhere. If you sell the house, you will get a good amount of money (hopefully more than you originally paid). That money will have to go towards the purchase of a new house or towards renting one.

    • retirebyforty November 24, 2013, 5:37 pm

      Yeah, you do have to live somewhere. I also think buying a house is a great first step. It will force people to save and living in your own home is so much more comfortable than renting.

  • Martin November 23, 2013, 11:30 am

    I like Kiyosaki’s view on assets and liabilities. He puts things together in a simple way so everybody understands it. Unfortunately it is easy to understand, but difficult to implement (in many cases).

  • The Passive Income Earner November 23, 2013, 2:56 pm

    That’s what I remember from Rich Dad Poor Dad too, assets should generate income otherwise it’s a liability. Turn your home into a rental income and voila!

    I am currently in the Middle Class working towards Financial Independence. My goals are to have income streams to rely upon rather than simply have a large retirement fund to withdraw from. That’s why my investments are all generating income.

  • ResilientMan November 24, 2013, 2:14 am

    Kiyosaki has recently also been talking about gold and silver as genuine investments. This article correctly classified such investments as Neutral. The big disadvatange with these investments is that they do not generate yield.
    Kiyosaki on Silver : http://www.youtube.com/watch?v=msw73t9G38E
    ResilientMan.com

  • MoneySheep November 24, 2013, 1:50 pm

    Kiyosaki is a pitchman and a good spinner. He refuses to identify Rich Dad. Any honorable writer would have named him, if only out of gratitude.

    In my view, his idea of creating a “Rich Dad” to portray a concept of personal finance is a good one. (The theme of ficticous guru advisers was popular at that time, several personal finance books were published with similar theme). If he had continued to write about financial literacy for people he could have been a good “asset” to general public. Instead the snake oil salesman (as mentioned by several readers above) took over. His subsequent books spin around a topic, running circle around it, but never state what that topic is.

    Kiyosaki was sued by co-author Sharon Lechter. Sharon Lechter, Kiyosaki’s co-author of Rich Dad, Poor Dad, sued him in Clark County, NV (Civil Case #07-A-549886-C). It was filed on 10/12/07.

    Lechter had alleged that the Kiyosakis had enriched themselves, diverted assets and wasted money in a business that she claimed to have helped build from scratch. Lechter also had claimed that she “often rewrote large sections” of books she and Robert Kiyosaki co-authored.

    http://www.azcentral.com/business/articles/2008/09/04/20080904biz-richdad0904.html

    • retirebyforty November 24, 2013, 5:40 pm

      Ahh… Thanks for that info. I didn’t know that “Rich Dad” might be fictitious. It’s a good concept though.

  • On_A_Mission April 30, 2014, 10:08 pm

    Great article. I read Rich Dad Poor Dad about 10 years ago and it really opened my eyes about assets and liabilities and I really liked it when he gave the example treating yourself to a nice liability like a fancy car but only if your positive cash flow investment is paying for it and that’s only possible when you finally make it to FI but preferable the Wealthy quadrant.

    I’m also now on a mission to acquire as many assets as I can. I paid off my first house which was a starter home and I rent that out so its positive cash flow. I made a huge mistake right after I got married and the new wife she of course wanted a big fancy house (4000 sq ft) hence I was trapped in a $425K mortgage now with no light at the end of the tunnel. 5 years after we bought the house we got a divorce and I know the person who keeps the house usually ends up in great shape financially especially since we bought when the market was really down and now just 5 years after being divorced the house has appreciated 20% (since its a sellers market here) and I also paid off my primary home so now I am mortgage free.

    I recently paid cash for a single family rental home ($130,000) which is nice since there are no closing costs and no interest to make the fat cat bankers richer!! Since my primary home is paid for I just took a HELOC loan out for $200,000 and I bought another single family rental property for $156,000. The HELOC loan is also like an all cash deal since you pay no closing costs and other fees related to a conventional mortgage. I now have all 3 of my rental homes rented for $1400 month x 3 so my positive cash flow per month is almost $4200 per month – taxes,insurance and expenses. My goal is to pay off the HELOC loan at the end of the year then use the same HELOC to buy one house with it or maybe leverage myself and purchase two or three more rental property’s using the HELOC money and conventional mortgages.

    I’m 38 with no wife or kids, I paid cash for my last car which is new and I have zero debt, so I think I will be FI when I have 5 rental property’s that are all paid for. Most people don’t realize that a wife and kids are both huge liabilities. LOL!!

    Anyway, I posting all this because I would like your opinion on what you think I’m doing right, could be doing better and what I’m doing wrong and what traps I need to be watch out for. For example, a lot of people say I should never pay cash for homes and I should leverage myself more, but every time I see a mortgage P&I statement it makes me think I making the fat cat bankers rich again!! I was also told that I need to go with an S corp next since I now have 3 rental properties and some have said I need to also do an LLC. I need help on what you think my next steps should be and which are the best legal tools to protect my assets and reduce my taxes are. Thanks for all the help!

  • John June 24, 2014, 12:17 pm

    Oh god. You’re one of those. His seminars are NOT worthless. His advanced training is also REALLY good if you follow what you’re taught and are not afraid of taking that extra big 4,000 leaps. As a Kiyosaki reader, you should understand the differences between the E’s and S’s vs. the B’s and I’s. The training teaches you to be a B and I and do things that the E’s and S’s are afraid of. Looks like you will be an E or S since you bash RDE programs by just watching Youtube videos which ultimately means you fail in the following of Rich Dad Poor Dad.

    (HINT: Kiyosaki managed to un-do his former business partners’ mistake and broke ties with Russ Whitney. So the Tigrent name is no longer attached to Rich Dad Education.)

  • James July 27, 2014, 8:02 pm

    Core insight – don’t forget that investing in common stocks can yield compound effects that assets like gold or savings bond can’t.

  • Adam February 15, 2016, 2:43 pm

    You said you had two most influential books you’ve read, one being Rich dad Poor dad. What is the second on?

    • retirebyforty February 15, 2016, 5:33 pm

      That was Charles. If you’re looking for beginning personal finance books, I’d recommend the Millionaire Next Door and Your Money or Your Life.

  • Blythe October 27, 2016, 3:15 am

    Say I have only £100 spare, the rest I need to spend solely on food and rent, what assets can I buy with such a small amount of money?

    • retirebyforty October 27, 2016, 9:28 am

      With that small amount, you should invest it in yourself. Take classes or learn something that can increase your income. Once you earn more money, you can invest it in a low cost index fund like VFINX, Vanguard’s S&P 500 index. Focus on increasing your income first. Good luck!

  • Colton Carlisle August 9, 2017, 6:21 am

    Good morning! Great article! however I was wondering if land was considered an asset? Also, I would a cell phone be an asset if you use it for work? I am assuming it would be all about how much profit vs expense you have from using your phone. I do not know how that could actually be accounted for though.

    • retirebyforty August 10, 2017, 9:20 am

      I consider land an asset because the value goes up. Hopefully, you’re not paying too much property tax.
      Phone, I’m not sure. Work should pay for the phone if you use it for work.

  • Lazy Man and Money September 10, 2018, 3:39 am

    Thanks for bringing this article back from 2013. I had missed it the first time around.

    This was the biggest, maybe only thing that I took away from the book too. It was around page 62-63 in my edition. I remember it because it was an eye-opening moment for me as well.

    Another reason I remember the page is because Kiyosaki has marketed himself as a guru to the MLM/pyramid scheme community. I have to continually point out Kiyosaki never mentions MLM in the book and that the book would be against MLM. MLM has liabilities (forced buying of products, training tools, etc.) and doesn’t deliver an asset in most cases (most people can’t make a sale).

    (Sorry for the off-topic rant MLM there.)

    • retirebyforty September 10, 2018, 10:46 am

      I know he got started with the MLM crowd. He became a best seller author because he sold through that channel. Kiyosaki has a lot of flaws, but he helped me think about assets in a different way. The rest of the book is motivational, but not very practical. That’s why I recommend reading other basic PF books first. You’ll have to pick out the few good bits and ignore the rest.

  • Chris @ Duke of Dollars September 10, 2018, 4:00 am

    I think Joshua Kennon put it best for me in one of his articles:

    “I’ve never entered a financial transaction that lost money on purpose”
    In other words, he maximizes his life to make decisions that produce more and more good assets to build wealth while he sleeps.

    OH yeah!!

    • retirebyforty September 10, 2018, 10:47 am

      I’m sorry, but I’m not familiar with Joshua Kennon. The quote is really good, though. I guess he won’t buy a house. 🙂

  • Xrayvsn September 10, 2018, 4:07 am

    I was exactly like you regarding thinking a house is an asset. It definitely is more of a liability as it has constant running costs (property tax, maintenance, insurance, etc) with no cash flow.

    I actually no longer include its value even when it is fully paid off when calculating my net worth (which I use for retirement purposes).

    • retirebyforty September 10, 2018, 10:49 am

      That’s right. I thought buying is always better than renting, but that’s not necessarily true. Having a house is an expensive endeavor. It’s great that you don’t include your home anymore in the net worth calculation for FIRE. It’s more conservative that way.

  • Jonathan September 10, 2018, 4:42 am

    “A house is good because it forces people to save.”
    >> Oh boy. If you’re someone who needs to buy a house to force yourself to save, you have major problems.

    “Renting out an extra room is even more lucrative today with Airbnb.”
    >> I wonder if it’s common for HOA to prohibit Airbnb rentals. Are there any data out there on this?

    • retirebyforty September 10, 2018, 10:51 am

      I know it’s not ideal, but that’s how most American families are. They have to be forced to save.
      Our HOA prohibits short-term rental. That’s another reason why we’re selling. If we can rent short-term, it’d easier to keep our condos.
      https://retireby40.org/sell-rental/

  • Tom @ Dividends Diversify September 10, 2018, 4:47 am

    Thanks Joe. I love timeless advice like this. The principles of building wealth really do not change much over time. Tom

  • Pennypincher September 10, 2018, 6:31 am

    Car=money pit. Although the guy in line before me at the repair shop asked why his repair bill was so high. The service tech said to him “You play, you pay.” LOL!

    House=big bottomless money pit.

    • retirebyforty September 10, 2018, 10:53 am

      Exactly. A luxury car is a bigger money pit as I learned from owning the BMW for a few years. Repair and maintenance cost a lot more. It’s silly.
      House is tough. You need to live somewhere, right? You just have to hope leverage + appreciation will offset the running expense. It’s not a sure thing.

  • Financial Verdict September 10, 2018, 6:39 am

    Your home is an asset – at the moment that you sell it and turn it into cash. Otherwise, generally it is only a liability until you pay off the mortgage, unless you are generating cash flow out of it via AirBnB or otherwise.

    It can be an asset in some other forms such as if it allows you to avoid other liabilities, such as running a home office instead of paying rent for office space.

    • retirebyforty September 10, 2018, 10:54 am

      It’s really tough to generate enough money to offset the expense too. One of my friends got a 4 bedroom house and rented out 3 rooms. That’s enough to pay all expenses. But how many people would do that? We only rented one room out and that wasn’t even enough to pay the mortgage. 🙂

  • MrFireby2023 September 10, 2018, 7:06 am

    There’s a “neutral asset” that I am continually accumulating a collection of that will appreciate in value with absolute certainty and I plan to post an article about these on my blog…Rolex watches.
    There’s a huge demand for the sport models and the authorized dealers can’t keep them in stock, in fact they have waiting lists. In the “gray market” the new ones are selling for premiums of $1500-2000. over suggested retail.
    I’ll provide more details in an upcoming post.

    • retirebyforty September 10, 2018, 10:55 am

      I was thinking about Rolex watches. That’s why I used the picture above. 🙂
      You’d have to hustle and be in the know to make money, right? I guess you can buy used watches and keep it until it becomes a collectible. That would cost a ton of time and money.

  • Dividend Pursuit September 10, 2018, 7:42 am

    Joe,

    Thanks for the article. Like you I start with reading Rich Dad Poor Dad and it changed how I view assets. I agree House is not an assets but a necessity. I think a mix of stocks and rental properties, may be a good start although rental is not as passive as stocks.

    Cheers

    Dividend Pursuit

    • retirebyforty September 10, 2018, 10:57 am

      I like Rich Dad because it was a quick and easy read. It provides the motivation to become wealthy and has some useful tidbits. But now I know it has a lot of bad advice too. It’s tough to recommend a flawed book like that. I hope young readers take it with a grain of salt and read other books to improve their investment knowledge.

  • Wealthy Doc September 10, 2018, 9:53 am

    I agree about Kiyosaki.
    He has some great big-picture ideas and a lot of repetitive junk around it. This is one of his best ideas. I had taken enough accounting classes to know the “right” definition of an asset. It that sense the Rich Dad is wrong. But his clearer definition of an asset as something that causes cash to flow TO you is a practical one. He was proven right about “your house is not an asset” during the subsequent housing market crash.
    I also like your scale. Apparently, I am truly “wealthy.” I was relieved to see that. I would have hated to change my name to “middle-class Doc.”

    • retirebyforty September 10, 2018, 10:59 am

      Thanks for your comment. I did some research on the internet and asset is ill-defined. I like the way Kiyosaki define it, though. It might not be 100% correct, but it’s a very useful way to look at it.
      I’m glad you can keep Wealthy Doc. 😉

  • Dr. McFrugal September 10, 2018, 12:28 pm

    Great read and overview!

    I agree with your assessment of assets and liabilities, but people’s situations can be different.

    I think my home and car are actually assets.

    My home has appreciated by 20% since we purchased it. It would more than cover our property tax and maintenance (we bought our house brand new so minimal maintenance issues). We also have solar panels on the roof that generate about $50-100 in passive income. Sure, we do have a mortgage loan on it, but it is at a very low interest rate around 3%. I have then used debt arbitrage to invest in the stock market producing far greater returns than 3%.

    My car is not a terrible liability and sometimes I consider it an asset. I don’t have to pay for gas since it’s electric. I charge my car for free at work (which is why my solar panels are overproducing and I’m generating money from them). Also no maintenance for the car too! The car also takes me to work safely and effectively, and without it, I wouldn’t be able to go to work (which is my biggest asset right now).

    Thanks again for the great read!!! 🙂

    • retirebyforty September 11, 2018, 10:07 am

      Can you do the math on the house and post it? I don’t think you can count on the appreciation. It doesn’t put money in your pocket until you sell and you’ll have to pay a ton of transaction fees. Even with the solar panel, you’ll still pay plenty out of pocket to live in your house. That’s why I call it neutral.

      • Dr. McFrugal September 12, 2018, 8:22 am

        After thinking about it a little more, I think you’re absolutely right. Our house is not a true asset and I agree it’s more of a neutral asset.

  • Eric @ Flip n Finances September 10, 2018, 10:00 pm

    You bring up a good point that many people can’t even clearly distinguish between an asset or liability in their lives. It’s widespread and people need to be more educated when it comes to this. I haven’t seen compound interest do wonders yet on my assets, but I’m sure by my 30’s it’ll be like a nice train picking up speed. Here’s to more assets!

    • retirebyforty September 11, 2018, 10:11 am

      Keep investing. Compound interest takes a long time before it becomes the dominant factor. Keep at it and you’ll get there. Good luck!

  • Gentleman's Family Finances September 11, 2018, 4:31 am

    Housing is a very interesting ASSET/LIABILITY and I think that a lot of people have it the wrong way round.
    A good example of this was amongsy my peers who bought flats 10 years ago and were looking at buying houses 5 years ago (earning more now, starting families… pick your reason).
    They were uniformly delighted that their flats had gone up by 67% (say from £150,000 to £250,000) and that meant that (simply) grown their equity by £100,000 in just 5 years. £20,000 a year tax free money!. They had therefore benefited from House Price Inflations
    I tried to point out that their new home had also gone up by 67% from £300,000 to £500,000 and in fact the rising market has cost them £100,000 (£200-£100) but they couldn’t understand it.

    We all need somewhere to live – shelter. How we chose to pay for it is up to us as consumers. BUT it’s ultimately a LIABILITY for most people and costs you money over time.

    My family are in the same boat and we are now using geoarbitrage and a bit of house hacking – just started on airbnb – to help things along. But whilst property has been benevolent to me, I think that for most people it’s their biggest waste of money and not a road to riches for the masses.

    • retirebyforty September 11, 2018, 10:12 am

      You’re right. Trading up means you’re spending more money. The bigger home will cost more to fund. You just have to recognize that it’s a liability and not an asset. Geoarbitrage is good. We’ll get there at some point too.

  • Damn Millennial September 11, 2018, 5:58 am

    The building blocks of wealth. Everyone must focus on building income producing assets and avoid over spending.

    Let those assets build over the years and then reap the benefits. Simply no way around it short of selling a start up for big bucks.

  • Steve @ familyonfire.org September 11, 2018, 9:23 am

    I do include our house in our net worth / assets column, mainly because I know in a worst case scenario we could sell up and move to a cheaper part of the country and free up some cash.

    I also include the car, but only in an abstract sell back for a fraction of what we paid for it sense. I also depreciate it every couple of months.

    • retirebyforty September 11, 2018, 10:13 am

      I include our house in our net worth too. But I also recognize that it takes money to live here every month. In that sense, it’s a liability.

  • The Debt Shrink September 11, 2018, 2:43 pm

    Hi Joe, I know you have rental properties, but knowing what you do now about assets and liabilities, do you include your PRIMARY residence in your NET WORTH calculation? I don’t include my car, but do include my home. What you think?

    • retirebyforty September 12, 2018, 10:50 pm

      Yes, I include our primary residence in our net worth. It’s not a big piece of our net worth so it’s not a big deal currently.

  • Financial Orchid September 11, 2018, 9:36 pm

    I think my upbringing has just conditioned me to stop buying sunk cost goods. That combined with business school, moving around for work, and living in small spaces.
    I don’t even have a car and it’s definitely an interesting discussion busting out in my car2go to coworker’s houses!

    I think being car free is definitely less of a stigma for a female than a male though. I don’t even know why!

    • retirebyforty September 12, 2018, 10:53 pm

      That’s great! I think being car-free is less of a stigma now. Lots of people don’t have a car in Portland. 🙂

  • Kalle September 12, 2018, 12:58 am

    Your home is a bit special I think, since you really don’t want to live on the street.
    Even if your house(or a condo you own) will not put money in your pocket every month, in a well functioning market it should be cheaper than to rent a similar home. I.e. mortgage+running costs should be less than what you’d pay in rent for the same house.

    So it’s not an asset by this definition, but it should make less cash disappear from your pocket every month compared to renting. That is the return on the money you have invested in your house. But, in some markets that return is negative, so that renting is actually cheaper, but that is not a healthy market.

    • retirebyforty September 12, 2018, 10:54 pm

      I think renting is cheaper than buying in Portland. The housing price has increased quite a bit over the last 10 years. The big cities on the west coast are pretty expensive.

  • Graham September 12, 2018, 8:37 am

    This is great and sound advice, not all debt is bad and creating money producing assets is probably one of the best things you can ever do to improve your finances.

  • The Family Escapes September 12, 2018, 9:17 am

    I totally agree, especially the bit about buying a new car.

    I recently wrote a post about money mistakes and called buying a new car “The King Of Net Worth Destroyers”! Research shows they lose 60% of their value in the first 3 years! …Robert Kiyosaki wouldn’t approve the negative impact on cash flow. 🙂

    PS. I share the same opinion on Rich dad, poor dad!

  • Alan September 12, 2018, 12:17 pm

    Everything that you bought, received as a gift, inherited, etc. is an asset. A house gives you a place to live, if you didn’t own it you would have to pay rent. For example, my house could be rented for $3,350 a month, that’s the cash flow I don’t have to generate by living in it. Now, whether it’s a good investment or not is a different question, but it is definitely a benefit producing asset.

    A car is also an asset, it gets me to work, to family and friends, shopping and entertainment. If I didn’t have it, I would have use pubic transportation (practically nonexistent in Los Angeles suburbs) or taxis. I also happen to enjoy driving a nice sports car on curvy roads, the experience is often akin to meditation. Concentrating on the road, the steering inputs, changing gears, listening to the roar of the engine and the squeal of the tires clears my mind and puts me in a better mood. So my car asset is paying me by not having to shell out money on other modes of transportation and not needing a therapist. How much one spends on a car is a different question. If you’re someone that views cars only as a means to get from point A to point B, then you will not derive the same benefits as I do, and should get a practical used vehicle. If you have access to great public transportation or if every place you need to go to is within walking or biking distance, then a car is a poor investment. When I went to graduate school in Boston, I left my car in LA with family and only enjoyed driving it during infrequent visits.

    My Rolex is an asset, I bought it for $1,500 in the ’80s in Switzerland (the dollar was really strong at that time), a new one today is $13K. Every time I wear it, I feel a little better and it often triggers warm memories of that European vacation. My stereo and home theater systems are assets and “yield” countless hours of entertainment and relaxation for me as well as family and friends.

    I don’t particularly care much about what I wear (jeans and t-shirts are my favorites), but if clothing is something that gives someone pleasure and lifts their self-esteem, then that is also an asset. The same can be said for fine art, jewelry, books and other collections. These assets do not produce cash flow and do not always appreciate in value, but yield in other ways.

    To define assets as only something that produces monetary cash flow is too narrow. We are human and live by more than bread alone. If I only owned cash flow producing assets, life would be awfully dull. To me the question is: do I delay gratification by channeling my money into cash flow producing, appreciating assets or not. I prefer a balanced approach.

    Now, for the purpose of calculating assets I need in retirement, I include only retirement accounts, HSA, brokerage and bank accounts since I don’t intend to sell any of my other assets in retirement. However, I do take into account reduced housing costs by owning a debt-free house and reduced transportation costs by having a paid-for car.

    • retirebyforty September 12, 2018, 11:00 pm

      That’s how most Americans think of assets. But it’s not working out. A huge percentage of us are not doing well financially. Those people need to think about assets and liability differently.
      It sounds like you have good income and can support those purchases. That’s great, but what if that income disappears? All those assets you have will drain your cash savings quickly. Anyway, Thanks for the extended comment. I think you’ve got the retirement calculation right.

      I don’t think you’ll need therapy for driving a cheaper car. 🙂

      • Alan September 21, 2018, 10:57 am

        Most of my income disappeared on April 1st when I retired. The retirement budget includes maintaining those assets. My sports car is 16 years old and is worth between $3K to $5K, already cheap therapy 🙂

  • GYM September 12, 2018, 11:30 pm

    Great post. I think a lot of people who are on the “FIRE” train realize this, but most people do not… and view cars, or ‘things’ as assets. I agree that a home is not an asset, but I still like to include it in my net worth haha 🙂 It can be an asset once you sell it and it transfers to cash, but of course you need another place to live unless you rent.

  • Allan Smith September 13, 2018, 11:09 am

    The concept of asset and liabilities is not clear to many people. As you were confused at the beginning, many people still do not understand this concept clearly. You have provided all the details so clearly and with such a perfection, now it should be an easy topic to understand. Thanks for the great post.

  • Young and the Invested September 15, 2018, 6:27 am

    Housing can be a real drain if handled inappropriately. Using it as an income stream is great if you have the space, tolerance for living with others, and desire to increase your passive income. Housing can also be a wonderful asset if not used as an income stream. Certain thresholds must be met to judge the house’s value creation ability. If the annual appreciation offsets the expenses you cite above, it’s a worthwhile endeavor.

    In an appreciating market, housing serves as a forced savings mechanism. Regularly, it replaces the basic savings account and easily represents a family’s greatest vehicle for wealth accumulation. Once again, however, if the house is in an appreciating market.

    Redefining assets and liabilities is a good way to shape how you think about wealth creation and financial independence. I tend to avoid spending on items seen as operations and maintenance expenses (O&M) and prefer investing in assets that build value over time. Whenever possible, this is how I prioritize my spending. It looks like we agree on this philosophy.

  • FIRECracker September 20, 2018, 3:00 am

    “Rich Dad Poor Dad by Robert Kiyosaki. The book is an easy read, but it has many flaws*.”

    Agree with you there! I really liked the cash flow quadrant idea he introduced, but there are lots of flaws in his advice. I do agree with the assets and liabilities though.

    Have you ever played his board game? It was fun for about 2 mins, then we easily figured out the game strategy (just borrow your brains out and invest in stocks and real-estate) and then it got really boring after that.

    • retirebyforty September 20, 2018, 1:32 pm

      Many of his ideas are flawed. It’s best to read Rich Dad after you already know a bit about investing. It’s a good motivational book, though.
      I’ve never played Cash Flow. Thanks for the low down.

Leave a Comment