Secret to Building Wealth – Buy Assets, Avoid Liabilities

by retirebyforty

Here is the secret to wealth – Buy Assets and Avoid Liabilities. I think the first time this became clear to me was when I read Rich Dad Poor Dad by Robert Kiyosaki. That’s an easy to read book with a strong message and it should be on everyone’s reading list. Check your library if you haven’t read this yet. He has his faults, but I think he helped many people break out of the endless cycle of consumerism. (Don’t go to the seminars, they are pretty sketchy from what I read.) Anyway, what are assets and liabilities?

Assets and Liabilities

Kiyosaki defines ‘asset’ a little bit differently than your usual financial experts. To him, an asset should generates positive cash flow for you. Anything that takes money out of your pocket is a liability. Almost everyone else includes everything in your net worth in the asset column. This was quite a revelation to me and it’s a great way to think about how to spend money. It taught me not to rely on earned income (from a job) and to focu

Let’s look at it from another angle

Good – Income producing assets such as stocks, rental properties, promissory notes, and bonds.
Neutral – Appreciating assets such as your home, gold, artwork, antiques, and collectibles. I’d say these are neutral because you never know if the appreciation will beat inflation and the cost of upkeep.
Liabilities – Depreciating assets like your TV, furniture, and other personal properties. These things are just sitting around leaking money.
Worse Liabilities – Income consuming assets like your car and cell phone. These things need a monthly cash infusion to stay functional.

Of course, most of us need our car and cell phone to function in the 21^st century. It’s natural to have more liabilities than good assets when you’re starting out, but you need to accumulate good assets to become wealthy.

Where are you on this table?

Poor – Own mostly liabilities and need to keep working to feed your lifestyle.
Middle class – Have been investing for a while and own some good assets. I’d say once the value of your good assets surpasses 50% of your net worth, then you’re firmly in this class.