This article is a guest post from the blog Investors On The Rise.
A very important lesson I have learned throughout my self studies of personal finance is from the book by Robert Kiyosaki known as Rich Dad Poor Dad. This is where I learned the true difference between assets and liabilities. Now, the Google definition of an asset is a useful or valuable thing, person or quality. The definition of a liability is the state of being responsible for something. These definitions are very unclear, so I hope to shed some light on them!
I learned from reading this book that an asset has the power to bring money to you and a liability takes money away from you. Throughout this article, this will be the definition we are going to use as we dive into the mind of Kiyosaki. I hope to share with you a different perspective of your own assets and liabilities. This different mindset may help you when it comes to making the difficult money decisions made on a regular basis.
What Are Assets?
Try to spin the traditional definition of an asset on its head. We are going to talk about what I believe is the true and most important definition of what an asset is. An asset is an investment tool that brings in cash flow.
Perfect examples may be real estate, dividends, or royalties. There are many different types of assets. Not all have the power to generate cash flow, but purchasing assets that do can be a tremendous wealth builder.
There are some charts in the book that show how most middle class people live today. If you are not careful, you could fall into this yourself. As you can see in the picture above, most people rely on their one source of income which is their salary from a job. They then proceed to take on a lot of expenses and liabilities. This, in turn, is what people use as I believe excuses as to why they can’t invest their money into assets. Or, they have some of the other beliefs such as “money is the root of all evil, I don’t need money to be happy, etc.”
If people took the money they spent on unneeded liabilities and purchased assets that will generate income, such as rent from a rental property, dividend income from dividend paying stocks, bonds, notes, etc. you could completely change your financial outlook.
You may be a lot better off in not only your financial life, but in your personal life as well. You will stress less about money and the less you stress, the happier you are! Imagine instead of having to pay out $100 a month towards a liability such as your car payment, you instead earn $100 from an asset such as from your dividends. It would most likely put a smile on your face (because I know for me, it does!) For certain assets, you could reinvest your earnings and get your best friend compound interest on your side. A change of your mindset about money can have a tremendous impact on your life.
One of the biggest challenges when building assets is that it can take a long time. If you don’t have the upfront cash to put in right away, it can seem difficult to get started. As someone who is building up my assets slowly, but surely, I can tell you that it will be worth it in the long run. Eventually, you will have multiple streams of income working for you. Diversifying your income is a great wealth builder. Having this freedom will allow you to do things you wouldn’t be able to do otherwise.
What Are Liabilities?
These are what you need to stay away from! These are car loans, mortgages, credit card debt, school loans, etc. that just eat away at the hard earned money you make. Not all liabilities are bad, but many times liabilities can quietly destroy your cash flow without you even noticing. How can anyone get ahead in life if they only have one source of income with no assets while at the same time keep racking up expenses and liabilities? It is near impossible to attain financial freedom when you are spending more money than you make. Now, certain liabilities can be good such as a mortgage on a rental property. At this point, it is an asset not a liability because that rental property will put money in your pocket. I would try to eliminate as many liabilities as possible so you can purchase income generating assets.
Write down a list of all your liabilities and see which ones you can get rid of so you can increase your cash flow and purchase more income generating assets. Your mindset plays an extremely important role when it comes to dealing with liabilities. You have to maintain a strong mindset and stick through the tough times in order to reach financial freedom.
You can’t have the following money mindsets:
- Negative thoughts about money
- Believing you can get rich quick
- All talk, no action
- Negative thoughts about being wealthy
Eliminating these thoughts from your mind is one of the essential steps when cutting down on liabilities and expanding your assets.
Overall, I hope this “new” definition of what an asset and liability are will help you in your future endeavors when it comes to financial freedom. By working on building up your income generating assets, such as dividends from stocks while at the same time working on eliminating liabilities, you will increase cash flow and your overall take home pay. I would recommend reading Rich Dad Poor Dad as this lesson that I learned will forever be one of the most valuable pieces of information when it comes to money.