Asset vs. Liability

For most people, the idea of asset vs. liability is a blur. It often becomes more confusing when you go to your banker. When you go to the bank to get a loan, your banker asks you to list your assets as collateral to ensure you can pay back the money they are about to lend you. What is most commonly listed…. house, car, jewelry…

This is the single most significant idea that makes the middle class not productive. They buy long-term debt items such as cars and jewelry as their income increases, which allows you to list items that do not bring any income into your cash flow. Your banker contributes to the possibility that you will default. This idea produces many other problems with one’s cash flow.

Those who are financially literate understand that assets are things that put money into your pocket every month, regardless of whether you work or not like a well-run or business-operated rental property.

A liability is something that takes money out of your pocket every month, whether you work or not. This is anything with monthly payments but usually a house, car, or another luxury.

If you get a pay rise and spend extra money on something that locks you in an agreement to pay X dollars for the number of years X, then you have fallen into a trap. By not investing your money into assets, you agree to continue working for money.

Now that you understand the difference between these two concepts, you must reevaluate your current financial status. Do you have assets, or do you have long-term debt obligations for liabilities?

Some people still argue that they can sell cars or houses to generate income. They are right, but they sell their obligations, they are not assets and should not be confused by this.

With those ideas in mind, we can now resolve many of the problems in the cash flow patterns of the poor and middle class.

The next step to getting rich is understanding the three basic patterns of cash flow.