Robert Kiyosaki of ‘Rich Dad’ fame says that an asset is something that puts money into your pocket. This is a great definition and it gets to the core of what an asset is.
Most of us say that our home is an asset. This cannot be further from the truth! Ask yourself, ‘Does it put money into my pocket every month?’
When you realise that you’ve made a mortgage payment on it this month, paid electricity and gas bills to heat it and spent thousands repairing the old roof, you will think not!
Now if you have rented out the spare room and the lodger pays you enough to cover your mortgage, monthly heating bills and insurance and some money towards repairs and maintenance, then your house may be an asset.
What should not be factored into the calculation is the capital appreciation of your house. Although we live in times where the value of property goes up, sometimes it doesn’t, so we can’t rely on that as regular income, whereas your lodger’s rent is. (Let’s just assume that you have a good lodger).
So next time you spend money on something, will you get any money back from it, and what rate will you get it back? These are the sort of questions wealthy investors usually ask.
If you spend money on ‘Doodads’ or expensive toys, then that is up to you, but that money is completely lost and may only be partially recovered if you sell those toys later.
A liability then, is the opposite of the above, it is something that takes money out of your pocket. Something that you might rent over the years such as a car, TV or your home, is a liability.
Obviously, to have a better lifestyle the idea is to reduce your liabilities and increase your assets. Put in plain English, it just means watch what you spend your money on.
It can be difficult in deciding on a good lifestyle balance. You want some enjoyment, so toys can be good, but don’t overdo it. Think before you spend.
Ask yourself questions such as ‘Would it be better to buy the new car outright’ rather than renting it. Remember all rent is dead money, you will never get it back. You need to be on the receiving side of that rent equation and not on the spending side.
Once you understand the differences between assets and liabilities and put a plan into action, your wealth will increase!