First, you should know what an asset really is. Dictionary.com defines an asset as a useful and desirable thing or quality. I like Roberts Kiyosaki definition, which states that an asset is only something that puts money in your pocket. Liabilities would obviously be the opposite. You should always be buying assets and paying down liabilities.
The problem I believe most people have is that they don’t know what an asset really is. People call things like cars and homes assets, but if you truly think about it, you are paying for a home or car. A true asset will be making you money. A car is definitely going to depreciate as soon as you drive it off the lot. A home can be an asset, but generally isn’t as great of an investment as people would think when you consider inflation, taxes, and upkeep. There are, of course, investment properties and rental homes which can provide cash flow and would definitely be considered a great asset.
What kind of assets should I buy?
You should be buying assets that are making you money. I know this may seem like an endless list, but not all assets are one in the same. It is all about the cash flow – how much cash is coming in and how easy it is for me to access it. It’s all determined by what the person wants from their assets. Some people want their assets to produce a yearly income now, so they would need assets with low volatility and steady income returns. This generally done with interest from bonds or dividends from high dividend yielding stocks. On the other hand, you may want to grow your money exponentially, resulting in a completely different strategy that involves much more risk.
What is a liability?
A liability by definition is moneys owed; debts or pecuniary obligations. So if you are losing money, or if you are paying someone else, it is a liability. In an earlier paragraph, I mentioned a house not being a great “asset” because usually you are paying a mortgage and are definitely paying taxes monthly. These are just the fixed expenses, since there is also maintenance and repairs to consider. Home ownership is expensive! In a few years, your home value may have risen, but by how much in comparison to what you have paid over time? This is just an example and I don’t think that you shouldn’t buy a house, but I think to call it an asset can be suspect.
You will probably need to have certain liabilities that are a part of life. You may need a car to get you from A to B, so that is an important liability to have, as is a house. The big thing is that you shouldn’t live above your means. There is no need to buy a new car or a big house when they don’t allow you to save money and build up the assets that are going to make you money. If you have the money to buy those items and still save than it is fine, but you have to have the cash flow to do that.
If you want to be successful, you should be filling your personal balance sheet with more assets and less big liabilities that will take away from your cash flow. Make sure you have a plan and that you’re purchasing of assets matches what you have planned. If you are buying liabilities, don’t buy more than you can afford – which means living and still being able to save money. If you would like to know more about what good assets are, then check out “Rich Dad Poor Dad“ and “Rich Dad’s Guide to Investing” both by Robert kyosaki.
Also, check out our upcoming articles that will go in-depth on some of these assets which might be right for you. We post new content every Tuesday and Friday.