building block what is an asset

Financial Building Block: What Is An Asset?

Putting money in your pocket instead of taking it out

A while back, I spoke with a woman who insisted, “My diamond bracelet is an asset.”

“Are you going to sell it?” I asked.

“Of course not!” she responded indignantly.

“Well then is it putting money in your pocket today?”

“No,” she admitted.

“Well, then it’s not an asset.”

The definition of an asset

Robert’s rich dad had a way of putting things in very simplistic terms. His definition of an asset is still one that I use today:

“An asset, whether you’re working or not, is something that puts money in your pocket.”

Period. Simple.

Why this is important to understand

If you stopped working today, meaning your salary stopped, from where would money flow into your pocket? Most women I explain this to for the first time reply, “Nowhere.” There’d be no money.

Examples of assets

An asset may be a rental property that has a positive cash flow. It may be a business in which you invested that gives you cash flow every year. It could be a stock that pays a dividend. The key is that it is an investment from which you receive money on a regular basis—it provides positive cash flow.

Examples of liabilities

On the flip side, a liability is something that takes money from your pocket. So, if you stopped working, chances are your car would take money from your pocket each month through car payments, gasoline, and maintenance. Your home would take money from you each month in the form of a mortgage payment, property taxes, insurance, and upkeep. These all provide negative cash flow.

My most important lesson

The reason people get into trouble financially or never get ahead in life is because they have liabilities that they have been led to believe are assets.

One of the most important lessons I learned from rich dad was to know the difference between an asset and a liability.

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Original publish date: June 05, 2014