| Learning the difference between assets and liabilities | | | | But then the question arises, "What if I pay off my |
| was a paradigm shift for us. If you ask an accountant | | | | home, is it an asset then?" Not likely. Because you still |
| or a banker to illustrate your balance sheet, here's | | | | have to pay property taxes and maintenance. Money |
| what he or she would probably show you: | | | | is still leaving your wallet. You either have to sell your |
| Balance Sheet | | | | house or refinance to receive any cash. |
| Assets - Home, Car, Boat | | | | "The fact is, when a banker tells you your house is an |
| Liabilities - Credit Cards, IOUs, College Loans | | | | asset, they are not really lying to you. They're just not |
| This is what we were taught growing up. You hear the | | | | telling you the whole truth." |
| advice that you should buy a lot of assets in order to | | | | -Robert Kiyosaki |
| increase your wealth. That's great news because who | | | | Now, if you have a property that you are renting out |
| wouldn't want a home, a car, and a boat? So, before | | | | and the monthly rent produces positive cashflow |
| my wife and I got married, we signed for a house and | | | | (money leftover after the expenses are paid, like the |
| we already had two cars. All we needed was a boat. | | | | mortgage), then the property is an asset. It's putting |
| The irony here is that if accumulating these assets are | | | | money into your pocket. |
| good, then how come they seem to cripple people | | | | My wife and I have a real estate property in |
| financially? The issue here is that what we were | | | | Tennessee. After the expenses of the mortgage, |
| taught were assets aren't really assets. They are | | | | taxes, insurance, and property management are paid, |
| liabilities. | | | | we have a positive cashflow of $45. It may not look |
| After reading the book Rich Dad Poor Dad by Robert | | | | like much, but come tax time, we can depreciate this |
| Kiyosaki, we learned that if you ask the rich to illustrate | | | | asset and take other tax deductions. |
| a balance sheet with the same items above, they'd | | | | What about your savings account? |
| show you this: | | | | Your savings account looks an asset because it is |
| Balance Sheet | | | | earning you interest. So, on your bank's balance sheet, |
| Assets | | | | it's a liability to them. However, remember that it may |
| Liabilities - Credit Cards, IOUs, College Loans, Home, | | | | not be keeping up with the rate of inflation. This can be |
| Car, Boat | | | | eroding your wealth. Now, I'm not saying that it's bad to |
| Notice the red items. What once were assets in our | | | | have a savings account or an emergency fund. But, |
| mind has shifted over to be liabilities. This is an | | | | just consider the fact that it may be taking money out |
| "unconventional" way of defining assets and liabilities. | | | | of your pocket. |
| The distinction is simple. | | | | So what's the goal here? |
| Assets put money into your pocket. Liabilities take | | | | The goal is to have enough positive cashflowing |
| money out. | | | | assets to generate enough income to cover your |
| So let's take your home for instance. The mortgage | | | | expenses. When this occurs, you can choose to either |
| on the home is the liability. You pay the mortgage | | | | leave your current occupation or stay. Your assets |
| monthly, which is money leaving your pocket. You | | | | should be on autopilot, with little or not involvement |
| receive no income from your home. This is why it is a | | | | from you. This is financial freedom. |
| liability. | | | | |