Secret to Building Wealth – Buy Assets, Avoid Liabilities￼
The secret to being wealthy is avoiding liabilities and buying assets. Rich Dad, Poor Dad by Robert Kiyosaki brings out this concept well. Although this book has quite a number of flaws, you will get good lessons from it. If you decide to read it, do not follow everything in there blindly. One of the most important lessons you will learn is how you can differentiate between liabilities and assets. The moment you understand this concept, it will be easier for you to build wealth.
Assets and Liabilities
For many people, assets are anything with a cash value—which is inaccurate. The first step to becoming wealthy is to consider your household finance a business. In simple terms, an asset is anything that can bring in cash flow in the future. Assets bring you money. If it takes money out of you instead, it is a liability.
A good number of individuals think that their car, home and other belongings are assets. These are just liabilities. When you have this view of liabilities and assets, you will have an easier time building passive income.
Check out some of the things you considered “assets”.
People say that your home is an asset; and a big one at that. When you purchase a house, you will pay for yard work, repair and maintenance, utilities, insurance, HOA, property tax, mortgage and furnish it as well. You will be paying out a lot of cash every month. The house may appreciate, but will the appreciation surpass the expenses? Everyone wants a house but it is not an asset.
For your house to make you some money, you can rent out any extra rooms.
Second to a house, a car is the most valuable possession for many people. It is a necessity, no doubt; but it is expensive. Nonetheless, it is definitely not an asset. In fact, it is worse than a house. It depreciates with every passing day and you have to buy gas. Think of it as a money pit. If you are not wealthy, avoid buying a luxury car.
Your Other Belongings
All the things you own are depreciating everyday—clothes, kitchenware, laptop, TV, etc. With that in mind, do you still want to buy that new unnecessary gadget?
Look at It Differently
- Good assets: these are assets that produce income. Think bonds, real estate, rental properties, etc.
- Neutral assets: these are assets that appreciate in value such as antiques, your home and artwork.
- Liabilities: these are assets that are depreciating.
- Worse liabilities: these are assets that consume your income (cellphone, car, boat).
Where Do You Lie?
- Poor: you have many liabilities and have to work to fund your lifestyle—regardless of how much you earn.
- Middle class: you have a few investments and good assets.
- Financial independence: income from your good assets is more than your expenses.
- Wealthy: your investments generate a lot of income which you reinvest.