If you have come across the terms “asset” and “liability” at some point in your life, then you are likely familiar with their textbook definitions:
Asset: An item of economic value owned by an individual or corporation.
Liability: A future obligation of economic value owed by an individual or corporation.
I am sure that we can all agree, it is desirable to have as many assets as possible, while limiting liabilities.
Growing up we are taught that pretty much everything we own that has value is an asset. Your clothes, your jewelry, your car, and that set of golf clubs are all things that we would call assets.
A Different Perspective
In the past couple decades many have become proponents of a new definitions for assets and liabilities. One of the most notable proponents is Robert Kiyosaki, who describes new definitions for assets and liabilities in his New York Times Bestseller, Rich Dad Poor Dad.
Here are the new definitions:
Asset: Something that generates income.
Liability: Something that generates expenses.
While these new definitions may seem simple, the implications are great. Following our agreed upon mentality, one should avoid liabilities and gather assets.
A House Is A Liability
One of the biggest financial decisions we will all make is not only whether or not to own a home, but also when. While I am not saying that you should not own a home, I would hope that those that do buy a home at least recognize that they are buying a liability. Unless you generate rental income from your home, your only hope of making money is banking on selling the house for more than you paid for it. Then again you could also end up selling it for less.
Once you buy a home you open up the door to tons of expenses: property tax, insurance, and random repair bills are just a few.
A car is the exact same way. Not only will you almost never sell a car for more than you paid, but as soon as you own the car you have to pay taxes, insurance, and maintenance bills. These all come straight out of your income.
Your Clothes Aren’t An Asset
Another important distinction between the textbook definition and the newer and more financially savvy definition is “if it doesn’t generate income, it isn’t an asset.” Sure, your clothes might not be a liability, but they aren’t an asset. Items like watches and jewelry could actually fall in the liabilities category if you have to pay to insure or repair them.
A Shift In Mentality
A lot of what you are reading may sound crazy, but the real purpose of me writing it is to change the way you think. Don’t persuade yourself to buy something like a watch or jewelry by convincing yourself that it is an asset because it holds value relatively well. Persuade yourself to buy something that can generate a lot of value. For some this could prompt you to have a virtual garage sale one weekend and turn all those old “assets” that aren’t generating any income for you into a new asset that will.
It might seem trivial, but if you managed to sell $1,000 of stuff that was just sitting around and used it to buy a true asset, say Coca-cola stock (KO), that asset would pay you $32 every year in dividends alone. How many of those shirts in your closet that you never wear ever handed you a crisp $20?
Make it your mission to stack these assets under the new definition and you my friend will do well.
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