Before you can buy assets, not liabilities, you needed to know the differences between assets and liabilities.
In its simplest form, an asset puts money in your pocket, and a liability takes money out of your pocket.
On a podcast I was listening to recently, Rich Fettke from Real Wealth had a slightly different definition of assets and liabilities that I really liked. He said that assets are anything that gives you health, wealth, happiness, or time. Liabilities are anything that takes those away.
If you want to be on a path to building wealth, then you need to buy more assets and have fewer liabilities. That is the opposite of what most people do. It’s going against the crowd.
Now, you may be wondering, why should I buy assets, not liabilities, and how do I do that?
Why Buy Assets Not Liabilities?
Let’s think of assets as “positive,” since they add money to your net worth. Assets typically help you increase your net worth, such as stocks or cash-flow-producing real estate (hint: your home isn’t an asset).
On the other hand, let’s think of liabilities as “negative,” since they take money away from you and/or your net worth. Liabilities are things like mortgages, student loan debt, or credit card debt.
Robert Kiyosaki explains his view on assets and liabilities, as well as how you can convert liabilities to assets:
Let’s use another example to explain the differences between assets and liabilities, and to also clear up a common misconception about them.
You need a place to live, right?
You might think you need a traditional single-family home or an apartment like most people, but there are so many other ways to satisfy this requirement.
Renting a room, apartment, or house would not be giving you any assets — it would just be increasing your liabilities.
You could purchase a home, but according to both Roberts (Kiyosaki and Leonard, that is —both real estate authors), your primary home typically is not an asset. Most people feel a home is an asset, their biggest asset, in fact, but it’s not.
It’s not putting money into your pocket.
But, what about appreciation and equity pay down?
Those can be great, but what about all the interest you paid and the upkeep for repairs and maintenance?
Most people who purchase a home for $300,000 and then sell it decades later for $600,000 feel they doubled their money.
In reality, they did not. Not even close. They likely barely turned a profit.
How is this? From the $300,000 “profit” (Robert Leonard calls this Phantom Profit), you must deduct property taxes, insurance, repairs, maintenance, and interest paid over the decades that the property was owned. This leaves very little real profit.
That’s not even including a large non-cash expense called opportunity cost.
Your home is hardly an asset when you think of it this way, huh?
Not all is lost, however.
If you want to make your home truly an asset, you can do so by house hacking.
You Need to Think Differently, Think Like The Rich
The first step in buying assets and not liabilities is to think differently. The average lifestyle is not going to support this path, but a life drowning in liabilities.
In order to build wealth, you need to invest in assets, not liabilities. How do you think the rich get richer? They buy assets, not liabilities. They buy things that keep putting more money in their pocket, rather than taking it out.
Instead of purchasing a new car with a monthly loan payment of $400, the rich will buy an asset that produces $400 in monthly cash flow, then use that cash flow to buy the liability.
Not only is the asset paying for the liability, but you get to keep the asset long after the liability is paid off!
This works for nearly any liability you want to purchase, not just cars.
Start thinking about how you are living your life now and what changes need to be made to buy more assets.
One of the most effective ways is to start house hacking — housing costs are the largest monthly expense for most people.
If you’re not investing in assets and have liabilities already, are there ways to make changes to switch your liabilities to assets? If you have a home, can you rent out rooms, storage space, or parking?
Once you have committed to buying assets, not liabilities, start to think of ways to do this across different areas of your life.
Do you have a car? Cars depreciate quickly and are expensive to maintain. You could try putting your car on a car rental site like Turo when you’re not using it. Then, you have an asset that is making you money.
Think and act like the rich, buy assets and not liabilities.
Diana FarmenDiana is a real estate investor and founder of Diana on a Dime, a blog to find resources on debt payoff, money management, and investing.
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