When I first started my business, I read a book called Rich Dad, Poor Dad and it is about the author when he was younger and the advice that he got from his dad who was poor and his friends dad who was rich. In the book he goes on to explain about financial literacy and the differences between assets and liabilities. It was this book that made me understand the difference between a poor persons mindset and a wealthy persons. To realise the difference you must first understand the difference between an asset and a liability.
In simple terms an asset is something that puts money in your pocket whereas a liability is something that takes money out of your pocket but it becomes a lot more complex than that and people tend to argue what things are considered to be an asset and a liability. It's not that poor people want to buy liabilities, it's that they buy them thinking that they are an asset whereas rich people buy assets and use those assets to pay for their liabilities.
What is an asset and a liability?
An asset is the direct result of something you purchase that makes more money than what it costs, whereas a liability is something that costs you more money than what it earns.
Examples of assets
- Blog website
- YouTube channel
- Royalties from music or book
What is the difference?
Let's say that you buy a car for £100, if you sell that car or use that car to make £150, you now have £50 profit which means that the car is a liability. On the other side of that lets say you buy the car for £100 and over time it costs you £200 in fuel, you now have a £100 loss which means that the car is a liability. Assets typically make more money over time whereas liabilities end up costing you money.
Most things that you buy will be a liability, these could include a house, a holiday, a watch, a coffee machine, a phone but whether they are liabilities or not will depend on your ability to use them to make more money than what they cost. Anything that you have ever brought that is sitting around not being used is likely a liability because it is taking up space and could be sold.
What you should do to become rich?
- Create assets that earn money over time
- Stop buying things that you do not need
- Buy assets to earn money over time
- Stop spending more than you earn
- Write a balance shot with an asset and liability column
- Reduce the cost of your liabilities by making some cuts and stick to a budget