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How do the rich get richer?
While the rest of us focus on our income statements, the rich focus on their asset columns.
The term asset columns come from Robert Kiyosaki in his book 'Rich Dad Poor Dad.'
Average people concern themselves with trying to get more income either on getting more pay or more income, which means working even harder for money.
The rich, though, focus on their assets and how their asset portfolio can bring in the money for them. By definition, an asset column is purchasing 'income-producing assets' that can generate sustainable money for you over a long period of time.
Start looking at things that can put money in your pocket by acquiring assets rather than liabilities.
- Assets can be anything from bonds, stocks, intellectual property, and of course, retail spaces.
- Liabilities include consumer loans, mortgages, and credit cards.
According to financial guru Robert Kiyosaki, assets should generate positive cash flow for anyone investing in them. Anything else that takes out money from your pocket is a liability. Understanding assets and liabilities in this way can reduce your reliance on earned income, which most of us get from a job.
Using https://taxfyle.com/blog/the-4-types-of-bookkeeping-systems can help you identify and categorize how your assets and liability work for you. Here's an example:
- Your House
Most of us think that our home, the one we live in, is our greatest asset. You're not wrong to think that way because buying a house is a big deal. It's also a great asset to you because you get to keep yourself and your family safe and protected in a place called home.
But then, if we look at it through a financial lens, a home isn't an asset. Purchasing a house comes with the periphery aspects of paying a mortgage, property taxes, HOA, utilities, repair and maintenance, yard work, furnishings, and insurance. All of these elements mean money leaving your pocket. Will this house's appreciation value surpass these expenses?
Purchasing your house is a good purchase, no doubt, because it's a form of forced savings. A large portion of these savings goes into your mortgage payment, which you'll get back when you sell your house at some point.
The appreciation of assets is a big deal, which is why it's a good investment. That said, a definite way of ensuring that you generate money from your house is by renting out the extra rooms you don't use. Of course, if you buy it for your family to live in, you're probably not willing to rent the empty rooms.
When buying a house, and if it's your first house, here are some tips:
- Buy the right size of home for your family.
- Get a home that fits your needs and that of your family from the size, to the number of rooms, location, etc.
- Even if it's small, a home that's the right size is a much better investment than a home that's large and requires huge maintenance and upkeep cost.
You can use that money instead on securing other income-generating assets.
- Your Car
Yes, you already know that a car is a liability, yet it's an essential item to many people, and it's sometimes one of the first purchases a person makes before or after a house.
A car is a necessity that costs a lot of money, and definitely not considered an asset simply because it depreciates in value. The value of your car depreciates the moment it's sold, and it's a money pit.
Plenty of money will go into the upkeep and maintenance of the car from service, gas, upgrades, to modifications. Imagine investing this money instead? What do you do in cases like this?
Let's face it; most of us need a car to go to work, which brings in the money we need to purchase other investments. A car is an unavoidable expense for many people, but if you do need to buy a car, here's what you should go for:
- Only buy a car that provides basic needs.
- Don't buy a luxury car for the sake of showing off.
- Don't buy a car that requires high maintenance and upkeep.
Whatever else you own that's not an asset is a liability, and these are things that depreciate in value, such as your TV, your furniture, kitchenware, clothing, and gadgets. Unfortunately, all these things are needed to live comfortably, so if you're buying something in the liability category, make your purchases based on what items fulfill the basic needs. Does this no-brand kitchen mixer meet the needs of beating your cake mixture properly? Do you really need to get a high-end KitchenAid branded mixer?
There's no point in getting something extremely luxurious unless you've reached your financial wealth and goals. Until then, stick to the basics.
Here's a good way of looking at what you own in terms of assets and liabilities:
- Good – Assets that produce income such as rental properties, stocks, promissory notes, and bonds.
- Neutral – Assets that appreciate in value, such as your gold, home, artwork, antiques, and collectibles. These are neutral simply because the appreciation value depends on the inflation rate and the cost of maintenance.
- Liabilities – Assets that depreciate such as your furniture, TV, furniture, gadgets, decorations, and clothing. These things, while necessary, are actually leaking money.
- Bad Liabilities – Assets that consume your income such as your mobile phone and car. To maintain these items, monthly cash infusion is needed to ensure it stays functional and usable.
The thing is, we can't live without these bad liabilities unless you prefer living off the grid. We need our cars and cell phones to connect, to work, and to function in this day and age. While it does make sense to have more liabilities than assets, you need to start accumulating assets as and when you can because this will be the way to sustainable wealth.
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