Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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Yes, you can…. IF you are buying an asset. That is a big if. So, it is important to understand whether you are spending money on an asset. Fortunately, there is an easy way to figure it out.
Assets Vs Liabilities
In the great financial mindset book, “Rich Dad Poor Dad”, Robert Kiyosaki gives an easy way to compare two opposing ideas, assets and liabilities. If you haven’t read this book, I would highly recommend it (you can buy a copy here—affiliate link). He plainly states that an asset is anything that puts money into your pocket and a liability is anything that pulls money out of your pocket. To understand this, let’s use some common examples.
Let’s say that you want to be safe with your money, so you buy government bonds. The government bond has a promised return rate of 3%. So, you put in $100 and in a year then get $103 back. (Yes, this is very simplified). Congratulations, you just bought an asset. Your $100 became $103 so the Bond put money in your pocket.
Now let’s say that you buy a car because everyone says that it is an asset (heck, you can get a loan by putting a car up for collateral, right?). You can even pay $10,000 up front for the car. Good job, you don’t have a car payment. But now car ownership happens. The gas from your commute costs you $150 a month. Insurance is $60 a month. Registration is $120 a year. An oil change is $28 once a quarter. Maintenance when your car breaks, $360 a year (ish). So, forgetting the $10,000 you spent upfront, you are now shelling out $257 a month (on average over the course of a year) to own this car! That is a liability.
Should I Spend Money to Make Money?
It is okay to spend money to make money if you are absolutely positive that you are spending it on an asset. Buying assets help you to build wealth over time by increasing how much you earn. Liabilities are nice and helpful to have, but they keep your expenses high. In other words, the first rule of personal finance—spend less than you earn—can be rewritten to say, “Have more assets than liabilities”. So while we have to spend money on liabilities, we need to remember that to become financially secure we have to buy assets.
I Have More Assets Than Liabilities, What Should I Do?
Some people start their financial journey making a lot of mistakes and buying a lot of liabilities. That is okay. The next step is to try and turn your liabilities into assets. Make the money you spent make you more money. This can be with your house, your car, even that tool you splurged on at Home Depot (we’ve all been there). Almost any liability can become an asset if you use your imagination.
For example, I recently bought a camper. Many people would tell me that was a bad choice. If I was going to use it to go camping once a year, then they’d be absolutely right. Here is how I am going to turn my liability into an asset. First, I bought the camper as an upfront cost to work a firework stand—not the most glamorous job, but the camper is already paying for itself. Then, I can rent out my camper for up to $50 a night to others that want to use it. Overtime, that will cover the purchase price, any insurance I get on my camper, and hopefully a little extra on the side.
When Not to Buy “Assets”
There are many opportunities to spend money on things that sound like assets, but don’t really have a promised return. These can include paying online “gurus” thousands of dollars because they claim they can help you make money fast—don’t fall for flashy promises, do your research. Investments with promises of high returns that really turn out to be gambling and not investing—generally you should only invest with respected institutions or partners. Or buying commodities such as gold or art because you think their value will increase—it is okay to buy these just in case of inflation, but that is another post for another day. None of these are assets because they don’t put money into your pocket each month or year. So make sure that you are consistently making your assets bigger than your liabilities and over time you will have financial success.
What are some other examples of assets? How have you turned a liability into an asset? Tell me about it in the comments below.
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You can find a full list of definitions from this blog here
Assets: Things that put money into your pocket every month (or year). Sometimes equity in your house is also included as an asset, but I prefer not to include it. A car loses value every year (depreciates) so it is NOT an asset.
Liabilities: : Things that take money out of your pocket. This includes all of your monthly and yearly expenses. You will often hear that a home is your biggest asset (the opposite of a liability), but it takes money out of your pocket each month in the form of a mortgage, taxes, and insurance, so it is a liability.
Bonds: To raise funds for a project an entity (usually a government) will sell bonds or certificates saying that if you pay X amount now you will get X back with interest later. This gives them the money they need now and gives the investor interest on their original investment later.
Commodities: Raw materials that can be bought and sold. They hold value because they are useful, but the value can go up and down over time. Examples include Gold, Silver, etc., Coffee Beans, Wheat, and other raw materials.