I learned recently that one of my relatives just purchased a boat. All I could do was shake my head, knowing that this new purchase would continue to take money from his pockets long after the boat had been paid off.
Docking fees, maintenance, and gas would be money drains for years to come. He had just made a mistake that millions of us make every year. Instead of purchasing assets, we acquire liabilities that continue to hamper our ability to attain financial freedom.
To become financially successful, it’s critical to understand the difference between an asset and a liability. According to Robert Kiyosaki, author of Rich Dad Poor Dad, this difference is pretty straight forward. An asset puts money in your pocket, while a liability takes money out of your pocket. Accountants may cringe at this definition, but it will guide you to financial success.
Too many of us go through life accumulating items which we believe are assets, but which are simply liabilities in disguise. Cars, boats, and even our own homes are traditionally considered assets, but in actuality, they are liabilities because they continually drain money from our wallets.
Consider that your automobile constantly requires gas, insurance, and maintenance. Two car families face even more pain, shelling out twice as much in gas, insurance, and maintenance.
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But what about our house, isn’t that an asset? The evidence might point to the contrary. Let’s consider your mortgage, for instance. Over the typical life of a 30 year loan you’ll pay out over 50% of the value of your home in interest.
If your home costs $200,000, you’ll have shelled out over $100,000 in interest. That’s not to mention the money you lose to maintenance, utilities, and taxes. All of this for an investment that historically has only kept up with the rate of inflation.
Related: 4 Ways to save yourself from nickel and diming your way into the poorhouse.
Now, it’s important to point out I’m not suggesting you shun so called financial liabilities. They are necessary. We need a car to drive to work. We need a home to put a roof over our heads.
But, we should realize that indulging in money draining liabilities means less money is left over to invest in income producing assets. We should never purchase more home than we need or can afford thinking that it’s a good investment.
The rich acquire assets, and the poor and middle class acquire liabilities…… If you want to be rich, simply spend you life buying assets. If you want to be poor or middle class, spend you life buying liabilities. – Robert Kiyosaki
Here-in lies the key to financial freedom. Instead of pouring all of your cash into liabilities which will serve to only drain you of more of your hard earned money, look to invest in assets which will bring cash into your pockets. So what are some of the cash building assets that Kiyosaki and others advocate? Consider:
- Income generating real estate such as rental housing units, well located duplexes, or office/warehouse rental units.
- Stocks which produce income though dividends or appreciation (over the long term)
- Bonds
- Intellectual property – including music, scripts, patents, proprietary products
- Small businesses
Using these examples, let’s take a look at another one of my relatives who is planning to move to a new city after accepting a job offer. Instead of taking the plunge and purchasing a home – a liability, he has his eye on a duplex near his new job.
The money he plans to obtain from renting out one side of the duplex will more than pay for the mortgage and other expenses, allowing him to essentially live for free on the other side of the duplex. By purchasing this asset, he will be putting himself one step closer to financial freedom.
By changing your mindset and learning to value assets over liabilities, you too can side-step the liability booby traps that derail so many of us on our journey to financial freedom.
BMWK, what liability booby traps have you fallen into?