“The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. The poor and the middle class work hard for the money. The rich have money work for them.” - Robert Kiyosaki
In its simplest terms, an asset is something that puts money in your pocket, while a liability is something that removes money from your pocket. Some grey areas are confusing these two, but I will tackle that later.
An asset can include investment properties, businesses, and paper assets such as stocks and bonds. These things should put money in your pocket to be called an asset. So, for example, if you have a property that generates a rental income of $500 per week and your overhead costs are $450 per week, that property is making you $50 per week. Based on the definition, this house is a true asset. If, on the other hand, the same property costs you $550 per week, then, using the same definition, this is not an asset.
Liabilities are anything that takes money from your pocket. Apart from those that go toward purchasing assets, liabilities include most expenses. Such expenses include your car, your principal place of residence (more on this later), boats, vacation memberships, holiday trips, expensive watches, shoes, or anything else that does not generate you any income. Some might say that they use their cars for Uber, their boats for rental, or their spare rooms for Airbnb. But again, if these things cost you more than you earn from them, then by definition, they are still liabilities.
But wait, does this mean that your house is not an asset? If you stick to the definition, and your house does not make you any money, then no, it is not. It can be very confusing for some because when you apply for loans, the banks list your house in the asset column, not the liability column. But for your financial education, these definitions will apply.
Grey areas are those items that can be classified as assets or liabilities depending on what you do with them. Examples such as expensive artwork do increase in value over time. But unless you sell them, you are technically not making any profit from them. Also falling in this category is your principal place of residence. In a growing market, your house price value may appreciate significantly. Still, again, unless you monetise it (i.e., top up your home loan, sell the property, and release some of the equity to then purchase another property), then it’s still technically not an asset. Gold and silver coins or bars and jewellery are also some examples of this.
Many people will contest this definition and claim that their Louboutin shoe collection, signature bags collection, or stamp collection are all assets. Still, we will have to agree to disagree on this matter because, again, as the definition states, an asset is something that puts money in your pocket while a liability takes money from your pocket.
Perhaps it is time to write down all your assets in one column and all liabilities in another. Rich Dad Robert Kiyosaki says that you need to keep buying assets instead of liabilities to gain financial freedom.
Feature image: Photo by Bernard Hermant on Unsplash
