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Lesson: 2 Assets Versus Liabilities
These are the another two terminologies which are not being taught in the school. And this is the reason most of the people remain middle class or poor and struggle financially for the entire life.
If you understand the meaning and the difference of the two words Assets and Liabilities than you can really become rich and ultra-rich in your life. Rich people teach their kids the meaning of these two words very clearly since their childhood and that’s why their children make excellent financial decisions when they grow younger.
Diagram 1 Financial Statement Showing Assets and Liabilities. Assets put Money into your pocket by generating cashflow while the liability takes money away from your pocket by making expenses.
Asset means anything which appreciates in its value (Capital Gains) and / or Put money into your Bank Accounts (Cashflow) weather you work or nor.
Liability means anything which depreciates in its value and / or Takes money out of your Bank Accounts.
These are the basic differences between the Assets and Liabilities. In other words, Anything which puts money into your pocket is an Asset while anything that takes money out of your pocket is a Liability.
Rich people always buy Assets while middle class people always buy liabilities and after that struggle financially. Remember that, rich are those who spend their most of the life accumulating Assets.
Examples of Assets are – Stocks, Bonds, Gold, Real Estate, Mutual Funds, Businesses, Art & Paintings, Rare Wined, Web Properties (Blogs, Websites & Domain names), Intellectual properties, Copyrights, Patents ….etc..
Examples of Liabilities are – Debt, Car Loan, Credit card outstandings, EMIs, Club memberships, Luxurious Cars, Watches, Clothes, Status Symbols, Country Houses….etc…
Diagram 2: Rich Focus on the Asset Column While the Middle Class focus on the Income (Hard Earned Money) and the Liability Column
Most of the middle class think that High Income is the indicator of financial well beingness. Middle class think that people who earn high income are rich. But this is a Myth.
The Truth is that, people who have more assets are rich. Income has nothing to do anything with your wealthiness. The more assets you own, the more rich you will become.
Rich people accumulate more and more assets in their life and that’s why they grow richer and richer. While Middle class people have a false belief that the higher they will earn, the richer they will become.
And that’s why middle class work harder and harder at their job places to earn more income. This is because they think that the higher income they will have, the more richer they will become.
Diagram 3: Financial Statement of the Middle class – Middle class work hard for the Active income and focus on buying liabilities and these liabilities make them expenses.
Diagram 4: Financial Statement of the Rich. Rich focus on growing their Asset column. They create, acquire and accumulate more and more assets in their asset column and these assets generate passive income for them.
But well, Rich know that Assets make anyone richer and richer. The main limitation of Job Income is that, the day you will stop working, you will lose that entire income. But the advantage of owning the asset is that, once you acquire the asset after that weather you work or not, sleep or travel the world, your asset will keep generating passive income for you for the rest of your life and for your future generations even after you.
And that’s why owning an Asset is the smart thing to do rather than working hard at your job place to increase your income. Rich know this secret of owning assets since generations and that’s why they teach their children since their childhood the basic difference between assets and liabilities and importance of owning the assets.
If you want to become rich in your life than always buy assets. Always focus on growing the Asset column of your financial statement. This is because rich always think of growing their Asset column of the financial statement.
While middle class always focus on their Income. Middle class always look for the ways to increase their income. And that’s why they work hard at their job places, do over time at their job place or even do the multiple part time jobs to increase their income.
But they don’t know that the day they will stop working, their entire income stream will suddenly disappear. Rich know this fact since their childhood and that’s why they focus their time, money and energy to build their Asset column. And once they build sufficient asset column, after that weather they work or not, the money from their asset (Passive income) will keep flowing into their bank accounts for the rest of their lives and even after that.
Have you ever think that why rich people don’t work for anyone else? Why don’t they like to do a job? Is this because they are rich? Nope. This is because the rich people know that working for someone else (Job) means trading your time in the exchange of the money. And the day you stop trading your time in the exchange of the money, your income will also stop. But well, if you have spent your time and energy to build assets in your life than after growing your asset column sufficiently, even if you stop working for the rest of your life, the income will still keep coming from your asset columns.
And this is the prime reason why rich people start developing their own Businesses, Investments and Assets since their very early life. This is because they know that the time is very valuable asset and that’s why they use their time and energy to create assets (Businesses & Investments) which can provide them unlimited cashflow weather they work, sleep or travel the world in the future.
Now, just think in your financial statement and the financial statement of the company for which you are working as an employee. Well, when you do a job means trade hours in the exchange of your time, you are developing the asset of someone else (The owner of the company) in exchange of a monthly paycheck.
In other words, when you work for someone else. You are growing the asset column of that person by putting your time and energy in that business and thus making the owner of that asset/business more richer.
So if you want to become rich or super rich in your life than start developing your own assets in your life. Never work for someone else (job) and trade your time in the exchange of the money.
So How Rich people Grow their Asset Column?
Keep in mind that, rich always think in the financial statements mainly in the Asset column of their financial statement. They always focus and work hard to grow the asset column of their financial statement. This is because they know very well that the asset column of the financial statement is the only thing which can make anyone Rich or Ultra-rich.
You can grow your asset column by 3 ways.
01) Acquiring Assets out of your Hard earned money
02) Convert Something into Asset
03) Creating new Assets in the world
The first way to grow the Asset column is – you simply acquire assets out of your income. Say for example, you buy stocks, bonds, gold, real estate, mutual funds, web properties or any other asset out of your hard earned money.
The second way to grow your asset column is, you convert something into assets. Say for Example, if you have a bicycle then you can give it on rent. Or if you have a good stamp collection then you can put your stamp collection in exhibition and generate cashflow from it and thus, you have converted something into the asset.
Diagram: 5: Ultra-rich (Billionaires) Create New Assets in their Asset Columns by developing a successful business and later on taking it to the public.
The third way to grow your asset column is, you create new assets in your asset column out of scratch. Super rich people think in this way and that’s why over the time they become billionaires. Creating asset means developing businesses out of scratch or crating some kind of asset out of nothing such as writing a novel, writing a book, recording a music, making an art or painting or making an online application or anything like that.
You will have to use your mind very well to create assets out of nothing in your asset column. Say for example, take the example of Bill Gates. He developed the operating system for computers - Windows (Previously DOS) which he created out of nothing. Take the Example of Larry page who developed Google, the world famous search engine. See the authors, singers and artists around you. All of they create assets out of nothing and become rich.
Thus, Rich teach their kids to focus mainly on the asset column of their financial statement. In fact, all the rich people around the world are busy with growing the asset column of their financial statement. They put their time, money and energy to grow their asset column.
In contrast, Middle class people put their all time, money and energy to grow their income. And that’s why the more money they earn, the more hard work they will have to do. But for rich, the more assets they will grow, the more money their assets will generate and the less hard work they will have to do.
So understand the basic difference between Assets and liabilities and spend your time and energy behind growing your asset column.
Many Financial Advisors and Finance Gurus around the world advise you to live below your means (It means Spend less than you Earn). Well, The basic logic behind this personal finance advise is that, by reducing your expenses, you increase your Cashflow (Income – Expense). And this increased cashflow is used to buy more Assets. But for the most of the people this advise doesn’t work. This is because they don’t divert their Cashflow to grow their Assets. They don’t use their cashflow to create and acquire more assets. And that’s why not the all the people in this world who live below their means can’t become rich. Remember that, living below your means will only make you rich if you are going to divert that cashflow to grow your Asset column by either creating new assets or acquiring assets out of your Cashflow.
Billionaires are Ultra-Rich (Billionaires) because of their Assets and not Because of their Income
Now, let us discuss something about the billionaires. There are almost 1100 Billionaires in the world according to Forbes. Do you know that why these people are Billionaires? Well, most of the people in this world think that they are billionaires because they have earned those billions of dollars. But well, This is not the Truth. The Truth is that, these people are Billionaire because of the Net worth of their Assets in their Asset columns. They are Billionaires because of the Valuations of their Assets in their Asset column is above a Billion dollar.
Say for Example, Bill Gates is a Billionaire and world’s richest person because his own stake (Shares/Asset) in his own corporation Microsoft is worth of Billions making him Forbes Billionaire. So the moral of the story is that, you don’t have to earn a billion dollars to become a billionaire. But you need to acquire or create assets in your asset column which become worth of billions in the future.
So focus on growing on your asset column rather than growing your Income like Middle class.
Celebrities, Doctors & Lawyers are high Income professionals but not all of them are Rich
Celebrities, Doctors and Lawyers are high income individuals. They earn lots of money in their financial statements but still not the all of them are rich or even billionaires. This is because they only earn high. The higher they earn the higher they will pay in taxes and less they will accumulate. Most of the high income professionals in this world have a false belief that they are Rich because their income is high. And that’s why they never focus on growing their Asset column of the financial statement.
But the truth is that, you can be rich only by acquiring more assets in your asset column. You can not be rich by earning high income and without accumulating assets. This is because the day you stop working behind your hard earned income, it will suddenly stop while the income from your asset (passive income) will keep flowing into your bank accounts weather you work or not?
Diagram: 6: Biggest Offpaper Assets and Liabilities
Biggest Off-paper Assets and Liabilities
Some assets and liabilities are those which you can not write down or include on your Financial statements. This is because they are intangible. Here are they.
The Biggest Off-paper Assets are,
01) Time
02) Financial Knowledge
The Biggest Off-paper Liabilities are,
01) Spouse
02) Friends
Rich accumulate more Assets and less liabilities. And this is the reason why true rich people understand the value of their time. They have been taught since their childhood from their parents that, The Los Money can be recovered but the lost time can never be recovered. And that’s why the rich are time savvy. They spend their time in such a manner that it will produce On-paper assets. No matter how smart you become financially but if you become smart in your old age than there is no meaning. This is because you have lost your time to become financially smart. And that’s why time is the biggest asset.
Another great Off-paper Asset is your Financial Knowledge means Knowledge about money and how it works. Right now you are reading this article and gaining the Financial Education. This will be your biggest off-paper asset which will make you rich in the future. If you are young today but don’t have the Financial Education of money than your biggest asset –Time is of no value. This is because you don’t know what to do with your time. You don’t have any idea that you need to focus your time to grow the asset column of your financial statement.
Now, let us talk about the off-paper Liabilities. Always chose your spouse and Friends very carefully. This is because spouse and friends which are not carefully chosen can be your biggest liability. They will suck your Biggest Asset – Time and make you middle class or poor. You would have focus that time to grow your Asset column otherwise.
Exercises
Ex: 1 Make the habit of thinking about the Asset column of your financial statement. Before spending your time, energy and money always think first that how will your this particular move will help to grow your asset column?
Ex: 2 Take a paper and pencil and draw the Financial Statement line diagram on it. And think that How you can create new assets in your asset column? Think of starting your own business.
Ex: 3 Take a paper and pencil and make a list of Assets in one column and liabilities in the other column. Now, think that which are the assets that you understand more? Focus on those assets and acquire more and more of those assets and grow your asset column like anything.
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