Building Wealth #2 – Assets vs Liabilities

Hopefully you’ve read episode 1 in this series where we cover the basics on how we think anyone can build wealth by looking at their earning, spending and investing and that you’re fired up ready for another dose of life changing gold! Maybe we’re bigging it up a little, but this episode is all about understanding assets and liabilities. It might sound a little boring, and truth be told, it is, but understanding this will help you change your mind et to think like a money maker. Let’s get into it.

As always, the following is not financial advice, read our disclaimer

What are assets and liabilities.

Most people think about their budgets (if they have one) in terms of their income, bills, expenditure etc. A better way we feel to think about these things is by categorising them as assets and liabilities. We will keep this as simple as possible – an asset is something that puts money in your pocket, a liability is something that takes money out of your pocket. The more assets you have and the less liabilities you have, the more money you will make. Easy. So the goal is – accumulate more assets, cut liabilities.

Cool, so if its that easy, why do we need a whole article on it?

Glad you asked! The reason is because it’s really easy to interpret things as assets when they’re really liabilities, meaning that people end up buying assets

“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.”

Robert Kiyosaki

To illustrate what Robert Kiyosaki said in his book, let’s go through some examples:

Your gym membership, is it an asset or a liability? Correct! It’s a liability, nice and easy. It takes money out of your pocket, doesn’t put any in. It’s worth noting that just because something is a liability, it doesn’t mean you shouldn’t have it. With the gym for example, it may be very important to you to be in shape, fit and healthy. You may need to be in shape for your job for example and that’s OK. But still it’s important to recognise that it costs you money.

OK, let’s kick it up a gear. What about your car? Asset, or liability? Hmmm, a little trickier this one, because it has value. If you were to sell it, you’d have cash right? So it’s an asset? Wrong, it’s a liability. It takes money out of your pocket every month through car payments, tax, fuel, maintenance etc. Yes it has value, but that value is depreciating, which is even more money being taken out of your virtual pocket. Plus, you only get the cash if you sell it. Can you afford to sell it? How will you get to work? Liability.

OK next up – your home. Asset? Maybe. Depends on how you look at it. On the one hand, you’ve more than likely got some equity in your home that is increasing in value through inflation every year, technically putting money in your virtual pocket. On the other hand, it’s probably your biggest cash drain every month through mortgage payments, utilities, insurance and a whole host of other bills. We say – liability. Yes, the house is increasing in value, but money is only yours if you’re prepared to sell up, which is not the case for the overwhelming majority. After all, you need somewhere to live.

You have no assets.

When you break it down, most people have only one asset, their job. Most people don’t usually consider a job an asset, but for most people, it’s the only money making asset they have. Even so, we don’t like a job as an asset because even though it puts money in your pocket, you’re trading time for it, which in our book is one of the most valuable things we have.

Scary right? If you draw 2 columns right now with your assets and liabilities listed, following the rules we’ve laid out above, it might not paint a very good wealth building picture.

What to do

However, we’re here to help. Your goal, is to reduce / eliminate as many liabilities from that list as possible, giving you surplus cash to buy up money producing assets which you can list in the assets column. The more you can do this, the more assets you can buy and the snowball really starts growing.

Netflix, Amazon prime, Disney plus and Sky? Gym membership you don’t use? Magazine subscription? A very expensive car? Weekly shopping in Waitrose? You get the picture. For most people, there’s plenty of areas to tackle to cut those liabilities. We listed a number of things you can do in our first article to cut your spending.

What are money making assets?

Ok so, we’ve established one money making asset – your job. Like we said, we don’t like this as it relies mainly on how much time you’re willing to trade. The best kinds of money making assets are the ones that don’t rely on time. Assets that are working hard for you even when you’re asleep. You may have heard these assets referred to as ‘passive income’, because they don’t rely on you doing anything to ensure the money keeps coming in (though, we don’t actually believe any asset is truly passive of you’re doing it right).

Here’s some of the most common and proven money making assets:

Stocks and shares

The king of assets. Stocks and shares are one of the best assets for us as they are easy to get into, are largely passive and can provide a very good return if done right. Stocks are basically a part ownership in a company which you purchase for a fee, in the hope that the price of that ownership will rise in value, or that the company will pay you a fee as a reward for investing through dividends. Think of each pound you use to buy stocks as one of your workers. Once you send that pound to work, it will be working for you day and night, earning money for you for the rest of the time you leave it invested (providing the company is good).

You actually already invest in the stocks market without really knowing it. If you have a workplace pension, your pension is more than likely invested for you by the pension provider. A lot of that pot will likely be in stocks and shares. Isn’t it better to have control over what you’re investing in? We think so.

Property

The one people think of when they think of assets – property. No where near as passive as stocks, property can be a highly lucrative asset class if you know what you’re doing. The most common strategy here is to purchase a property, either with cash or part mortgaged from the bank, and then subsequently rent the house out to tenants who will pay you in rent that will cover your expenses and more. You will also benefit from the inevitable rise in price of the property – double win.

We have an article coming soon about investing in rental properties, but to boost your earnings on property, try going for an interest only mortgage and only paying a minimum deposit (because interest rates are at all time lows) and re-investing the profit for boosted returns!

The drawbacks with property is that you will likely need a lump sum for a deposit to get started. There will also be hefty fees as it will be classed as a second home and you can lose a lot of money if you end up buying the wrong property.

Side business

Finally, the third type of asset we like is a business. Starting a side business can be one of the hardest assets to gain and grow into something meaningful, but also offers the biggest potential reward (amazon started as a side business in a garage). Of you’re prepared to out in the hard work and if you have patience, you can really supercharge your asset building.

When starting a side business, our advice to most people when starting out is – make sure you can do it in your spare time, start something you love or turn a hobby into a business and make sure you’re prepared to wait to see results. If you can dot hese things,, you’re on the right path.

Next Up…

Thanks for reading! Click on ‘next post’ below for the next instalment of our wealth building guide.

Let us know your thoughts by leaving a comment below!

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