Blog | Personal Finance

Do I Have Assets Or Liabilities?

A brief education on assets and liabilities

play cashflow now

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 reply with “Nowhere.”

There’d be no money.

Here are some examples of the differences between assets and liabilities:

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.

A liability, on the other hand, 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.

Adjust Your Focus

Here is the revelation I had when looking at the income statement and balance sheet.

 

Income Statement focus

But the key to financial freedom is to focus on acquiring assets.

Balance Sheet focus

I was always told to focus on the income column. I was taught to get a job, work hard, and keep getting pay raises. Or if I worked on an hourly basis, I was taught I should put in more hours or increase my hourly rate. The focus was always on income, specifically ordinary earned income—increasing my salary, wages, or commission. As long as I put my focus and attention there, then I would be working hard for that income all my life.

The lights came on when I realized that the key to financial well-being is not to focus on acquiring income but to instead focus on acquiring assets.

When I made that connection, life became easier, both in my personal financial life and in our business – The Rich Dad Company. I focused on acquiring assets personally and also focused on the assets we were building within our company.

I also began asking one important question: What new assets am I building today?

It’s simply a different way of looking at the world.

Thinking Differently About Enjoying the Finer Things

How many times have you wanted something — a new car, a bigger house, diamond earrings, a designer handbag — but told yourself, “No, I can’t have that” because you couldn’t afford it? Perhaps you’ve consoled yourself with reminders that “nobody gets everything they want in life” or “maybe someday.”

I once felt the same way.

For example, years ago, I found something I really wanted: a beautiful, 60-foot long sailboat. There were two problems: 1) we didn’t have the money for it 2) we knew that owning a boat was a giant liability! Or at least that’s what we thought.

But I really wanted that sailboat, so I began to investigate ways that would allow me to purchase the boat and turn it into an asset. Instead of just letting it sit in a dock in Hawaii and writing checks every month to pay for the maintenance and the loan on it, we put the boat into a charter company. When we’re not using the boat, it’s chartered throughout the Hawaiian Islands. The money from the charter business pays for the expenses of the boat. Ahhhh, it’s so satisfying when assets and liabilities merge!

We do the same thing with our vacation house in Hawaii. It’s a beautiful house, but since we live in Arizona, we’re not there much. So, we rent that house out most of the year for thousands of dollars a day. The cash flow easily pays for the expenses of the house, and then some. Once again, we found a way to essentially combine assets and liabilities.

And the best part is that we get to enjoy the boat and the house whenever we want to, all paid for by the businesses we turned them into. Talk about having your cake and eating it, too!

Change Your Mindset; Change Your Life

When Robert and I got married, we talked a lot about money and how we were going to approach it together as a couple. For instance, we came up with the financial golden rule: any money in the asset column stays in the asset column. Another rule that we came up with was that if either of us wanted something fun, like a sailboat, we never said, “No.” Instead, we always said, “How?”

At the end of the day, living this way is all about mindset. Both Robert and I think it’s terrible to tell people they can’t have what they want — what a horrible way to go through life!

By shifting your mindset from, “I can’t afford this,” to, “How can I afford this?” you can literally change your life.The liabilities you want can actually make you richer as you get creative in finding ways to afford them by creating or investing in cash-flowing assets.

The most important takeaway

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.

Once you’ve got that down, you’ll realize that the strategy to achieve infinite wealth, where the cash flow coming in is equal to or greater than your monthly expenses, is very simple: Stop focusing on income and start acquiring assets that give you cash flow.

It’s no secret that wherever you put your time, energy, and focus will grow in your life. So if you want to achieve your financial dreams, you may want to put your time, energy, and focus on acquiring assets.

Robert and I designed the CASHFLOW board game to teach you how to think differently about money and wealth. The more familiar you become with standard assets and liabilities, the more creative your solutions will be for ensuring you have everything you want in life.

Today is the day to change your mindset about money. What is it that you really want and how are you going to get it?

Original publish date: May 07, 2015

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