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Oct 09

Assets, Liabilities And How To Tell The Difference

On face value this seems like a pretty straight forward subject to tackle.

Knowing the difference between an asset and a liability is essential.

Assets are things you own like a house, a car or even a boat or second home. Liabilities are different debts or risks you have or take on like credit cards, personal loans, etc. There we go, job done, assets and liabilities……..well, not quite.

Like most people wanting to start out in the world of investments, I read a ton of books. Not knowing where to start, I fell victim to some pretty bad “training programs” and self help books. One book I was very skeptical of, but pleasantly surprised with, was “Rich Dad, Poor Dad” by Robert Kiyosaki. Despite the title (which I’m personally not a fan of and screams of “get rich quick”), this book opened me up to some very interesting ideas, one of which was the idea of liabilities and Income generating assets. When I had previously thought of assets, I had often included things like homes and cars.

 

We’ve all heard the saying “your home is your greatest asset”……

                                                                                             …..But is it an asset at all?

 

According to Robert Kiyosaki, the answer is no.

You see, every month most of you (if not all of you) pay someone for the privilege of living in your home. Either you pay rent to a landlord (in which case this is definitely not an asset) or you pay a bank or lender a mortgage payment. In both cases, each month your home is COSTING you money, and therefore is a liability.

Your car (even if you own it outright) costs you gas, insurance, maintenance, etc. every month, which means you are losing money and therefore, it too is a liability. In short, anything you consider an asset that takes more money per month than it generates is actually a liability.

Recognizing this one idea was the simplest and biggest thing I took from the book, although there are a number of great points made. I suggest you all read it for yourselves and make up your own mind. Some of it I don’t agree with (like paying yourself first) but mostly it has given me a different outlook to investing and generating income and for that, I’m glad to have read it.

 

Build a secure, comfortable future by buying income generating assets.

Money Hedge © by Tax Credits

So how do I recognize an asset?

Not all assets are easily recognizable. Remember, I just told you your home is a liability? Well, not if you change the way you see your assets and liabilities. You could take that liability of a home and convert a spare room, guest house or garage into a sublet. Renting out a sublet of your property would reduce the cost of your mortgage from your regular income or even possibly generate monthly rental income. Just like that, your biggest liability (your mortgage) could now become an income generating asset and every month, instead of costing you money, you get paid!

 

Robert Kiyosaki

“… An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. That’s really all you need to know….”

 

Basically, an asset is anything that generates more money than it costs. So in some cases whether something is an asset or a liability really depends on how you see it or (most importantly) how you use it.

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With that in mind, here is a quick list of basic assets and liabilities.

 

Assets

  • Real estate rentals
  • Small business
  • Franchises
  • Online affiliate programs
  • eBooks
  • Publishing rights for music, books and films
  • Royalties (gas, oil, etc)
  • Dividend paying stocks and bonds, mutual funds

 

Liabilities

  • Mortgaged real estate (that you live in)
  • Cars,trucks and motor homes
  • Boats, jet ski, etc
  • Credit cards
  • Personal loans

 

So, it’s easy to see that the more ways in which you generate money from the things you buy, the more independently wealthy you become. The hard part (apart from getting your hands on these assets) is recognizing an asset when you see one and being brave enough to go for it. It is within many people’s capability to save away their hard earned cash and within ten years get $50k in savings. But who of you would then use that money to buy a franchise? Taking those kinds of steps when thinking about how you spend your money will help you to recognize opportunities, and most importantly empower you to go for it!

 

“….If you want to be rich or get out of the rat race, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities….”

 

There is a world of difference between the life of someone who buys income generating assets and someone who buys liabilities. As time goes on, the wealth of those who buy assets will grow and bring greater value. For those who invest in liabilities and live above their means, financial struggle lies ahead. Remember, this is a long term investment. When I was at college I took out a credit card to buy (and I’m showing my age here) an Apple Mac G3 tower. That card ended up costing me twice what the machine would have cost to buy in the first place and cost me two summers. While my friends traveled and relaxed, I worked on construction sites to pay off my debt. Last week I saw someone was giving away the same Apple Mac G3 tower for FREE on Craigslist.

It’s all a question of taking a long term perspective on your finances. My generation seemed to think like they were still 21 well into their 30′s and so I (and I’m sure I’m not alone here) need to take a long term look at where my money is going and how I can make it work for me.

 

In my next post I’m going to outline some rough plans of what I would like to achieve in the next 12 or so months and how I plan to get there. I hope you will continue to join me as I continue to explore, learn and share the world of personal finance.

 

“Rich Dad,Poor Dad” by Robert Kiyosaki is available in book, ebook, and audiobook formats from Amazon.com

 

 

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