Robert Kiyosaki of ‘Rich Dad’ fame says that an asset is something that puts money in your pocket. This is a great definition and gets to the core of what an asset is.
Most of us say that our house is an asset. This couldn’t be further from the truth! Ask yourself: ‘Does he put money in my pocket every month?’
When you realize you made a mortgage payment this month, paid the electric and gas bills to heat it, and spent thousands of dollars repairing the old roof, you’ll think no!
Now, if you’ve rented out the spare room and the tenant pays you enough to cover your mortgage, monthly heating bills and insurance, and some money for repairs and maintenance, then your house can be an asset.
What should not be factored into the calculation is the capital appreciation of your home. Although we live in times where property values increase, sometimes they don’t, so we can’t rely on that as regular income, while your tenant’s rent is. (Assume you have a good tenant.)
So the next time you spend money on something, will you get any of it back? At what rate will you get it back? These are the kinds of questions that wealthy investors often ask.
If you spend money on ‘Doodads’ or expensive toys, that’s up to you, but that money is completely lost and can only be partially recovered if you sell those toys later.
A liability then, is the opposite of the above, it is something that takes money out of your pocket. Something you might rent over the years, like a car, a TV, or your house, is a liability.
Obviously, to have a better lifestyle, the idea is to reduce your liabilities and increase your assets. Put in plain language, it just means watching where you spend your money.
It can be difficult to decide on a good lifestyle balance. You want to enjoy yourself a bit, so toys can be good, but don’t overdo it. Think before you spend.
Ask yourself questions like “Would it be better to buy the new car outright?” instead of renting it. Remember that all rent is dead money, you will never get it back. You need to be on the receiving side of that rental equation and not on the spending side.
Once you understand the differences between assets and liabilities and put a plan in place, your wealth will increase!