When most of us think of assets, we think of anything we own.
The opposite of assets in most people’s mind is therefore anything we owe, these are our liabilities.
The problem with these definitions, especially when thinking about Financial Independence, is that they are not particularly helpful to us.
Why might that be?
Well, there are many things that we would typically describe as assets, that do not really help us on our way to Financial Independence.
Take your home for example. If you own a house, most people would call that an assets. In most cases, it would be someone’s biggest asset.
When our home increases in value, we feel good about it. When property prices are rising, people tend to spend more.
Even the health of the overall economy improves when real estate prices rise. But why should this be?
Many think of their car as an asset and perhaps their watch or their electronics.
At this point I must credit Robert Kiyosaki and his peronsal finance classic, Rich Dad, Poor Dad for much of the thinking behind this article.
When I first read the book, I was already a CFP and Chartered Financial Planner and had taken a masters degree in Financial Planning. As such, the book didn’t really teach me much about money.
What it did teach me a ton about though was the principles of how to be wealthy.
There are a load of courses and qualifications that you can take that teach you about how money works, how the stock market functions and so on.
There is very little however, that teaches us how to be truly rich and this book is one of the few worthwhile reads on this particular topic.
In case I haven’t made it clear – you really should read Rich Dad, Poor Dad.
The problem with the traditional definition of assets is that most of the things that we include on the list actually cost us money.
Think about it for a second.
The home you live in – whether rented or owned – actually costs you money.
First of all you have the mortgage payment or the rent itself to pay.
Then there is the maintenance, property taxes, insurances – the list goes on.
Even if you own a home and have paid off the mortgage, the above list of costs still mostly applies.
The same is true for cars and watches and almost anything else that we might call assets – they cost us money.
When you buy a new car, you might have a finance payment to make, you have the insurance to cover, new tyres. Cars are basically a big money pit.
Now, that’s not to say that owning any of these things (especially a home) is bad. It’s just that we need to stop thinking of them as assets if we are serious about Financial Independence.
In fact, according to Rich Dad, most of these things are in fact liabilities, because they are costing you money.
The new definition for assets – the one that you need to understand and internalise if you are serious about Financial Freedom – is this:
As asset is anything that pays you money.
We can also take the reverse of this for a new definition for liabilities:
A liability is anything that costs you money.
Thinking about assets and liabilities in this way can be a little uncomfortable.
For starters, it goes against everything we have been told for the past few decades.
“Your home is your biggest asset”
“You should invest to improve your home, it is your greatest asset you know”
The other far more serious reason it can be hard to think of assets and liabilities in this way, is that, if you didn’t before, you may well now have a negative net worth.
Think about it, lets say you own a house worth $250,000 and you have a mortgage outstanding for $150,000. Most people would consider that they have a net worth of $100,000 ($250,000 - $150,000).
As nice as that six figure sum looks on paper, you can’t really use that $100,000 in any meaningful way. It is locked up in the home that you are currently living in.
The same home that is costing you money each month.
If you are serious about achieving Financial Independence and then Financial Freedom, you need to start thinking of assets only as things that pay you.
There are lots of things that pay you – an investment property, your investment portfolio, a side hustle business. These are all things that are paying you income each and every month.
If you want to achieve Financial Independence, you need to focus on building the asset column of your balance sheet, according to the Rich Dad definition.
When I prepare my own net worth statement, I track my ‘traditional’ net worth (being the simple total assets – total liabilities calculation).
I call this my ‘run away’ net worth. That is, if I sold everything I owned and paid off all my debts, this would be how much I had left to run away with.
Unless you are planning to sell everything and run away somewhere (which I am not) I suggest you also track your ‘Rich Dad’ net worth, which totals up only the assets that pay you income.
Although it is important to keep an eye on your traditional net worth, I would suggest you try to pay the most time and attention to your ‘Rich Dad’ net worth – this is where the key to Financial Freedom can be found.
Since reading Rich Dad, Poor Dad, I have found myself being far more considered with purchases like new cars, which I previously might have passed off as ‘assets’ when in reality they are liabilities that are costing me more money.
I have seen the light when it comes to assets. If you don’t own it already, please do pick up a copy of Rich Dad, Poor Dad – it really is a must-read for anyone who is serious about Financial Independence.
You can pick up a copy using the link below.