I’ll never forget the first television I bought for our family. At that time, T.V.s were massive– you basically had to have a crane to carry one! There I was, trying to get that $450 boat anchor we called a T.V. into my car, not realizing its value depreciated with every passing second. It was a liability, and today, it’s worth virtually nothing.
To build wealth, you must know the difference between assets and liabilities. An asset is an investment that will make you money in the future. When you invest in an asset, you increase your wealth. A liability is an expense that decreases in value over time. When you purchase a liability, you increase someone else’s wealth. This blog will discuss assets vs. liabilities and cover four ways to shop smart and invest wisely.
1. Be Selective: Only Purchase Liabilities That You Need
There are some liabilities that you can’t go without: food, electricity, transportation, clothes, and rent (if you don’t own a home) are all vital for a thriving life. While you won’t see a monetary return on your investment with these liabilities, the ROI will come in other ways. Food will keep you healthy and happy, electricity will keep you warm, shelter will keep you safe, and transportation will help you invest in life-giving relationships.
The point is to be sparing when it comes to purchasing liabilities. Always count the cost before purchasing a liability. Ask yourself: Do I need this? Does this product or service’s value outweigh the value of achieving future financial goals?
Sticking to a healthy budget will help you live within your means and still have enough to give, save, and invest. Here’s a good formula to start with:
10% on Savings
10% on Investments
Never use a credit card to purchase liabilities you can’t pay back in full each month.
2. Be Strategic: Invest in Long-term & Short-term Assets
When purchasing assets, diversification is critical. Diversifying the time frame is just as important as the type. Be strategic and invest in long-term and short-term investments. In doing so, you will hedge your bets, set yourself up for a good retirement, and make passive income throughout your life. Many people leave their investing to professionals and never learn how to make money themselves. Then, when they retire, they have a limited income and don’t understand why taxes are eating up their wealth.
So, tax-advantaged retirement strategies such as a Roth IRA and real estate are great long-term options. For short-term investing, purchase assets that will pay you monthly, quarterly, and annually. If you marginally increase the passive income you receive each year, one day, your investment income will surpass your earned income.
3. Be Patient: Wait to Buy Toys & Experiences with Asset Income
I’ll never forget a story that one young man told me about a cow and a dirtbike. I was explaining the concept of assets at a seminar when a young man approached me and said, “That’s exactly what my dad did for me when I was growing up. My dad’s a farmer, and when I was in middle school, all my classmates were getting dirt bikes to ride around the farm. I asked my dad if we could buy a dirt bike, too.”
His father jumped in and continued the story, “That’s right. But I told him, “I’m not going to buy you a dirt bike; I’m going to buy you a cow…In fact, I’m going to buy you a pregnant cow.”
The young man looked at his father and said, “But I told you I didn’t want a cow. I wanted a dirt bike. Riding around the farm on a cow wouldn’t be as impressive as riding on a dirt bike.”
His dad bought him a pregnant cow anyway, and that cow had two calves. The father and son sold one calf and paid cash for the dirt bike. At the end of the day, they had a dirt bike that was completely paid off, a cow, and another calf.
When you know the difference between assets vs. liabilities, you can have your cake and eat it too! Once your assets start to pay you, you can use that money to purchase the car, television, or trip you’ve been wanting. By buying assets first, you can actively build wealth. When your wisdom starts to pay off, you can purchase the liabilities you’ve patiently waited for. Plus, pausing before purchasing will help you discern what you really want.
4. Be Aware: Play the Net Worth Game
An understanding of assets vs. liabilities allows you to calculate your net worth. Let’s take an example based on a typical U.S. household and look at a simple asset statement.
Say a couple has cash savings of $7,500, a retirement account of $25,000, personal property (furniture, cars, etc.) of $50,000, and personal real estate of $200,000 (typically their home). They have no assets, real estate investments, insurance (annuity type assets), or equity in business or stocks and bonds. This represents a typical family with total assets of $282,500.
If we look at their liabilities, we see that they owe $20,000 on their personal property, which includes things like a $1,500 TV. They have personal real estate (mortgage on their house) of $150,000, credit card debt of $10,000, school loans (which are an epidemic in the U.S. right now) of $8,000, and miscellaneous debt of $3,000. So in total liabilities, they have $191,000.
This straightforward financial statement helps us find the net worth of a person. Take the total assets and subtract the total liabilities; the answer is your net worth. In this illustration, the couple’s net worth is $91,500.
Being aware of your net worth is an important metric when it comes to building wealth. Your net worth will grow as you increase your asset line and decrease your liabilities. It’s really that simple!
Thank you mr Billy for sharing that. I’m 23years old and i always think of how am gonna put these truths you share in practice. but I’m trusting the Lord and I know he holds my future. Again thank you so much for always sharing this knowledge with us. You are a blessing!
Great information… Thank you!
When laid out like that one can really see where they are financially !!
Thank you very much wealth Builders, your blogs are very helpful and inspiring may the good God continue to give you more insight.
Learning has no limit but the stuff one learn matters like the issue to do with assets and liabilities hope common in our life has been liabilities because they appeal to common or populous needs but putting us into dungeon of hell on the long run thank God his perfect plan is for our good much thanks for the insights I will never be the same