If you have ever tried to get a loan from a bank, or have applied for a credit card, you’ll be familiar with the term ‘asset’. Simply stated, the bank identifies those things that you own which can be sold for money to be an ‘asset’. For the bank, there must be a low risk to the value of these ‘assets’. Therefore, the bank thinks your house, car, expensive Armani suit and all the other valuable ’stuff’ you have are assets. Your bank is an idiot.
You are the idiot
The bank defines liabilities as debt that you have to pay rent over, for example. Again, they are idiots. But they are only idiots when dealing with you. When they deal with other banks or wealthy people they are not idiots. The reason is that you are not financially literate and thus don’t know what a true asset is. You are an idiot. But fear not, it can be helped in a matter of minutes.
If I haven’t offended you too much by now, and you’re still reading, good for you. You have made the decision to accept the fact that you may have been misinformed by your bank. That maybe, just maybe, there is a truth in the fact that your house is not an asset. Or your car. Or the $1500,- Armani suit you bought. Or the diamond earrings of your wife. Or the expensive wrist watch you love so much.
Liabilities
All the things you own that you can sell for money … are worthless. They are in fact, liabilities. It took me quite some time to get this through my own super-thick skull, but they are. The definition of a liability should be that it takes money out of your pocket. So your house, your car, it all costs money. It has to be insured, it has to maintained … it all costs money to do so. Not to mention that most things you own actually decrease in capital. So again:
Liability: Something you own that takes money out of your pocket
If you read this for the first time in your life this is a shocker. At least, it was to me. I always thought that owning a bigger house, a more expensive car, etc, would mean that I was rich. Well, it doesn’t. It just shows what an idiot you are. So the next time you see that big, expensive SUV driving by, remember that there is about a 95% chance that the ‘rich’ guy driving it is a complete idiot when it comes to money! Doesn’t that put things into perspective!
Assets
You can probably guess what the definition of an asset is, based on the definition of a liability. That’s right, it puts money into your pocket. Simple as that. This means that a house can be an asset. As can a car be. Just not your house or your car.
If you would own 2 houses, what would you do with the ’spare’ house? That’s right, you’d rent it to someone. And that rent, minus the expenses for the upkeep of the house, insurance, et cetera, is your income from the house. Not the capital gains, but the direct cashflow that you can use each month is what makes it an asset.
Capital gains is a myth. We have all heard ‘that house is worht so and so much’. But you only know that for sure after you’ve sold the damn thing. Until then, it is pure speculation. So capital gains are good, but not a defining factor for assets.
Asset: Something you own that puts money into your pocket each month or year
So with this in mind, how many assets do you truly have? Your job? That was about it for me when I started with this whole asset versus liability thing. And it scared the hell out of me, because my job is about the least secure thing I have. I am an entrepreneur, so maybe I don’t have a job next month. Who knows?
But the same thing goes for your nice, secure job. It is not secure. Just ask any of the thousands of employees that have lost their job years ago in the Enron accounting scandal. Did I mention they lost their entire retirement too?
Educate yourself financially
I would say that it is most important to educate yourself financially. Learn the basics of how money works. Don’t resent the rich for being rich, learn how they got rich. Learn the money game. Educate yourself on the matters of accounting, investing, law and marketing.
A good book to start with is Robert Kiyosaki’s Rich Dad, Poor Dad. This book explains the basics of assets and liabilities, having money work for you instead of you work for money and much more. It will stir your hunger to educate yourself financially. There are many other great books that teach the basics of money, but this is the absolute easy beginner manual.
Thu, Oct 29, 2009
Becoming Successful