Wealth Building

Assets and Liabilities

If you want to become rich and be able to retire early then the most important thing you learn is the difference between an asset and a liability. Rich people understand the difference and buy assets that make them richer, the poor and middle class do not understand the difference and thus make poor investment decisions that instead of making them richer actually work to make them poorer.

People work all their lives in an attempt to get richer, but with every pay increase their debt and expenses also increases. This increase in debt and expenses forces them to work harder just so they can make ends meet. With the simple understanding of the difference between assets and liabilities these people could be getting richer and richer instead of poorer and poorer.

If you go to your bank and ask them what an asset is they will tell you it is anything you own that has monetary value. But this is often inflated as value is just an idea until it is actually sold. This is NOT what an asset it. Your suits, your computer, your playstation, your cars are not assets they are liabilities. If you want to be rich then you need to start thinking like the rich do and the rich think differently about assets and liabilities.

To make it really simple to understand an asset is something that puts money in your pocket on a regular basis and a liability is something that takes money out of your pocket on a regular basis. For example, you car is not an asset it is a liability because it takes money out of your pocket for petrol, insurance, registration and maintenance. Your house that you live in is not an asset but is a liability because it takes money out of your pocket through maintenance, insurance, council rates and taxes etc. Rental investment properties can be both assets and liabilities depending on whether or not they put money into your pocket on a regular basis or take money out.

So an asset puts money into your pocket and a liability takes money out of your pocket. Rich people know the difference between assets and liabilities and they buy assets. By purchasing assets that generate you income you are increasing your means. Each time you purchase an asset your income goes up, giving you more disposable income and more money to invest each and every year. If you continue to use your money wisely your income will go up and up and up and it will be easier and easier to become richer and richer.

A lot of people will tell you that the smart thing to do is to save money. But rich people think saving money is risky. The cost of living is constantly going up due to inflation, which means the buying power of the dollar gets less and less every year. My mum used to be able to buy a bag of lollies for a penny when she was a kid, and now you can barely buy a bag of lollies for $1. Its the same thing, but the buying power of the dollar has gone down. So every year your money is going down in value if you simply save it.

However, if you purchase an asset like an investment property, when the buying power of the dollar goes down your property goes up in price to compensate, and not only that but your rents also go up to compensate. All the expenses of inflation are passed onto other people so you don’t lose money at all. If you just save money in the bank you $100,000 today would be effectively be worth a lot less in 10 years time.

Rich people don’t work for money they work to buy assets that generate them income. They understand that money decreases in value and they want to buy assets that will work for them so they don’t have to work for money. Both rich people are poor people go to work, but their motives for working create bipolar outcomes. One becomes richer as they work less and less and one becomes poorer as they work more and more.

Editor's choice