I recently read a very popular book on personal finance. It was called Rich Dad, Poor Dad. I’m sure many of you have either heard of it or potentially read it. I would like to focus on specifically one point in the book because I think it particularly powerful.
Although it may seem like a simple concept, it is the difference between assets and liabilities. The book makes a bold statement that “Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.”
The basis behind the theory is that an asset will put money in your pocket. A liability will take money out of your pocket
The author shares an insightful story of a young couple and the confusion between assets and liabilities. A young, recently married and highly-educated couple moved into a cramped apartment. They decide to begin to save money to buy their dream home and focus on their careers. Their incomes begin to increase, but so do their expenses.
They decide because of their higher incomes to purchase that dream house they had been picturing. Awesome!! Right? Maybe not as awesome as you may think. All of a sudden they are paying higher property tax, a common unrecognized expense during budgeting. They also buy a new car, new furniture and brand-new appliances to go with their new home. All of a sudden they realize that their liabilities column is full of mortgage and credit-card debt!
This couple is trapped in the Rat Race. Soon they have a baby and need to work even harder. Their increasingly rising incomes come with subsequent increased taxes, known as “bracket creep”. They continue to max out credit cards and spend money unwisely on things such as shopping trips.
Although your home may seem like your biggest asset it could also be your biggest burden. Here are a couple reasons why:
- Most people spend the majority of their lives paying for a home that they never own. They buy a new home every few years and continue to incur new 30-year loans to pay off the previous one.
- The greatest losses come from missed opportunities. If all your money is tied up in your home, you will need to work harder to continue to pay for those rising expenses. This comes at the expense of adding to your asset column. The earlier on you build your asset column the better you are off long-term. Your assets can grow and help to pay for your expenses.
- Homes do not always go up in value.
In conclusion, assets are not always what they appear to be. A good tactic is to try to build up your asset column through things like stocks, bonds, rental properties and other assets that provide you with cash flow and use these to pay your expenses. If you can continue to grow these assets soon they will be able to cover all your expenses and help enable you to escape the rat race!
If you have any thoughts or opinions on the subject feel free to share below!