Successful investing needs a rewired mindset. To get there, we need to start with some key knowledge, which is what separates the rich from the poor.
Liabilities and Assets
Boring economic terms?
Not so! Easy to understand, with our simple definitions:
A liability is something that takes money out of your pocket.
An asset is something that puts money into your pocket.
A house is really a liability, not an asset
Many may disagree with this but let’s look at it with our definition above.
Is the house you live in putting money in your pocket or taking it out? Most definitely out.
A house may grow in it’s ‘worth’ but it will only be an asset if you rent it out and have a surplus after making any payments.
WHAT’S AN ASSET THEN?
So by our definition above, then, what are examples of assets?
I consider dividend-paying stocks, businesses, rental properties and education to be an asset. Non-dividend-paying stocks become an asset when they grow in value and you sell them for a profit.
With education, if you were to learn something and apply it – it is an asset.
The biggest reason people are afraid to invest in assets is that assets could lose money.
Eg after purchasing a brand-new car from a dealership, it’s worth 20% less the minute you drive it away.
Whereas with an asset like education, when you learn something that makes you money, you take that learning and repeat it to make more money.
When you lose money from something you learn and apply, it’s still an asset because you hopefully won’t repeat that mistake.
ASSETS PAY FOR LIABILITIES
Here’s another concept that underpins financial freedom:
Building an asset is the best way to pay for liabilities.
Talking to many successful business people, I find that they always focus on building assets to make more money – in order to invest in additional income generating streams.
When they do purchase liabilities, they have a minimum of two or three assets to pay them off.
IT’S NOT HOW MUCH YOU MAKE, ITS HOW MUCH YOU KEEP
We often ask or get asked; “How much do you make?”. The real question that matters is “How much money do you keep?”
Let me use a scenario to help you (and you can come to your own conclusion at the end of it).
In the outer suburbs of Melbourne, live two young men, Alex and Ahmed.
Alex makes 1 million AUD a year and Ahmed only makes 35,000 AUD a year.
Alex spends 990,000 AUD a year. Ahmed spends only 15,000 AUD.
After 12 months, Alex has a bank balance of 10,000 AUD. Ahmed has 20,000 AUD in the bank.
Who is better off? Hopefully, your answer is Ahmed 🙂
Rewiring your mindset is realising that how much money one keeps is more important than how much one makes.
This is because the money you make leaves your pocket at the end of the day.
If you can increase what you keep, you can use it to work towards building an asset that over time will pay for your liabilities without having to rely on a job.
Assets are the true way you can get ahead and on your way to financial freedom.
You can read the full article on Tabarruk, including the 3 rules to start rewiring your mind and a common mistake.
This is not financial advice. Please view our disclaimer