Wealth Mantra: Buy assets and avoid liabilities
Is there any formula which can make me or someone like me wealthy?
Keep on accumulating assets and keep on avoiding liabilities – This is a fool proof mantra to become wealthy.
OK, but can you elaborate as I can not understand this? The terms liabilities and assets are too technical for me.
Don’t go into too much technical details about ASSETS and LIABILITIES. To keep things simple and easy to understand let’s consider asset as something that generates a positive cash flow regularly. This is something that was explained by Robert Kiyoski in his famous book Rich Dad & Poor Dad. Also, we will consider anything that takes money out of your pocket as liability.
The above assumptions are quite simple as you have a very clear demarcation between assets and liabilities. Let’s scan through some of the common items and check if they add up as your ASSET or qualify as LIABILITY to you.
I am sure like everyone you also must be having a strong belief that your house is your biggest asset.
Yes, I have a big house with a big monthly payment going out against the home loan/ mortgage I took out to purchase it. It is indeed the biggest asset I have till date.
Keep our initial definition of ASSET and LIABILITY in mind. Let’s go through the expenses associated with a house.
- You take out home loan/mortgage to buy a house. You pay processing fees, lawyers fee and several other charges while purchasing
- You pay monthly maintenance charges to Association/Society for the upkeep of the common area and housekeeping charges for the common area
- You pay sinking fund
- You pay annual property taxes
- You dole out money to keep the house in proper shape – maintaining cleanliness inside the house, make sure all taps, fittings, fixtures etc are in proper working condition.
- You pay money for the repainting job every couple of years
The list can be pretty long. If you see, every single head mentioned above results in money going out of your pocket. Now if we go back to our original definition – it says anything that gives you regular return or puts money back into your pocket qualifies as an ASSET.
Now here we have our house which is not fitting in the definition of ASSET.
Sure, you can say that house price will appreciate in due course. But the appreciation can not match the kind of money that goes out of your pocket month on month to maintain the house.
So the house is a kind of liability. To counter the liability factor, one must buy the house which is of right size. The house which fits your need in terms of space and pricing. The moment you buy a bigger house than you need, money starts going into drain. Here I would like to add that if you have a rental property, then it is your ASSET not LIABILITY.
Oh, I was under the impression that I have a big house and it’s a big asset for me. Your arguments seems to be logical.
Let’s take CAR now:
It is said that the moment a car comes out of a showroom, it loses about 15% of its value.
On top of this, your car consumes money in
- Regular maintenance, oil changes, servicing etc.
- Car depreciate with the passage of time
- Wear and tear of tyres, other parts
- Annual insurance premiums
- Road tax
Here again we see that the car is consuming your money regularly. Hence your Car is also your LIABILITY. The takeaway here is unless you are super rich, don’t buy a bigger, expensive car. Remember a car is a mere tool to take you from point A to point B. So here again buy what you need, not what your neighbor drives. More details can be found here – Your car is not your asset
Hmmm sounds right. What about the items I owe like my belongings etc?
Now list down all your belongings. They are your LIABILITIES as they lose value over time. Be it your furniture, appliances, gadgets, books, DVDs, gaming devices etc. All depreciate. We have seen it earlier too here
You have listed down almost all my possessions under LIABILITY column. I am now curious to know what qualifies as ASSET?
- Your assets include your investments (FD/RD/ULIPs/Mutual funds, shares, ETF, Bonds)
- Any commodity (Gold/ ornaments)
- Collectible items
- Art (paintings etc)
- Rental properties
- Cash you are holding
All the line items listed above generate income over a period of time. They put money into your pocket regularly so they all classify as your ASSET
The key here in accumulating assets is to make financial goals, stay focused and never crib about your income but keep investing regularly.
Now, let’s see something interesting based on the classification of ASSET and LIABILITIES. Let’s see what poor, middle class and wealthy people do.
Poor: They mostly own liabilities and keep spending on feeding their liabilities.
Middle class: They have some assets but they keep on buying liabilities and spend their chunk of income in feeding their liabilities. They avoid investments and usually spend money to buy and maintain things they don’t need.
Wealthy:They generate a lot of income from investments and keep reinvesting. They accumulate good amount of wealth which can be passed to their next generation.
Now financially independent class: This particular class has plenty of good assets and income from investments is enough to take care of all their expenses. They constantly look for investment opportunities and never averse of buying good assets.
Bottom-line is one must keep buying good income generating ASSETS and avoid LIABILITIES like plague. If you stick to this, none can stop you from becoming WEALTHY. As you go on accumulating good assets, you get more freedom to take calculated risk in order to go for higher gains.
Happy investing !!!