Do you spend your money on liabilities or are you creating assets?
- itsimplecap
- Oct 23, 2019
- 2 min read
The reason most people struggle financially is because they haven’t been given [or they haven’t searched for] the right financial education. Most people buy a house thinking it’s an asset when in fact it’s a liability. Likewise, they buy a car thinking is an asset when it’s a liability.
Put simply, an asset is something that increases your wealth i.e. puts money in your pocket whilst a liability is something that costs you money, takes money from your pocket.
Assets Vs Liabilities
Real estate is generally one of the most effective assets one can invest in, however, most people take the wrong approach. When people consider real estate investment, they think of the house they live in. The problem with this mindset is that when you live in your house, money constantly goes out to pay mortgage, taxes, maintenance and utilities. Even if you have no debt on the property you still have to pay all those other expenses while the house brings zero cashflow back to you.
Likewise, when depositing money at the bank you are promised a rate of interest. In the UK this is currently in the order of 2%. Now take into account inflation the value of the amount you originally deposited in the bank is likely to be NEGATIVE in real terms.
Making money work for you
Financial intelligence is all about making money work for you rather than you working for money. Rich people deposit money at the bank to have liquid funds at hand to be able to buy actual assets. Having said that, rich people will always try to maximise the interest rate they can get while the bank holds their cash!
The main assets rich people invest in are real estate, stocks and other businesses. Contrast to most people, real estate investment for them means buying houses they can rent out (or sell). The passive income generated pays the mortgage, and other expenses associated with owning a house leaving you a net positive cashflow which is then used to buy liabilities.
By understanding the core difference between assets and liabilities you can start making money with real assets just like rich people do. Before spending money on something you should consider, “Is this product or service going to generate me an income or is it going to make me spend money on it without any financial gains?”
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