I once coached a small class on financial intelligence. My objective was to help them be more conscious of their money and put it to good use, for now and for the future. In starting that exercise I asked them to sum up their current net worth. I asked them to add up their assets and remove their liabilities. While I heard many ridiculous numbers ranging from -$6,000 to 0, there was a particular person that really amused me. His net worth was about $40,000, but what was really amusing there was that he had added the value of his car, his television, his home theater and other household appliances. After all, he had got them with the asset loan offered by his company or bank. You would wonder if the bank is out to deceive people about the real classification of those items, but one can’t really blame the bank, those items would actually be on the bank’s balance sheet as assets. More on that shortly.
Knowing that cars and household appliances are not your assets are not the real paradigm shaking realities, even though quite a number of people are caught within this poor thinking. The real paradigm shifter is realizing that your home is not an asset. The real shocker is realizing that the land you bought 5yrs ago for capital appreciation value is really not an asset. It’s realizing that those stocks you were trading, and the business you started that is yet to breakeven are not assets. Before any of these will make much sense to you, you need to first understand paradigm shift one. This is because, the definition of asset required to achieve financial security, differs from the definition of asset required for financial freedom, and once your concept of what an asset is changes, many things you thought were assets would cease to be.
The definition of asset we grew up with is that an asset is any economic resource that has value that can be turned to cash, including cash itself. Value however differs depending on if you are security thinker or a freedom thinker. Robert Kiyosaki’s asset definition comes from the thinking of someone whose goal is freedom. To this person, an asset is an economic resource that has a positive cashflow. An economic resource will only be judged an asset if it brings money into your pocket, if it doesn’t, but have value for future appreciation it has no place on your balance sheet, certainly not as an asset! If you need to spend money to maintain it, paint it, do documentation on it, pay mortgage on it e.t.c. it’s safer to call it a liability or better still a business.
Many of the things we think are assets are not. It’s best to judge every resource you control by this definition of asset. Value to you, is what can allow you earn income that can set you free. Once your goal changes, value is redefined.
Once this realization is clear, the things we populate our asset columns with drastically leans out for many people. If it’s not generating positive cashflow without your involvement, it’s not an asset! If you need to sell it to get value, it’s a business and should be classified in your income column. If it’s land, and it’s not being leased out to farmers, leave it out of being an asset until you have developed it or converted it to cash.
Also please note that because the bank calls the loan they are about to give you an asset finance loan, does not make what you buy with it your asset. Your liability is usually on the banks balance sheet as an asset. It brings money to them, it takes money away from you!
I marvel when I hear the paradigms of so many financial advisers and supposed veterans in the field of financial intelligence. What a person terms as an asset underscores his philosophy and definition of the concept of freedom. I hear them recommend the purchase of land, or the ownership of a personal house and doing away with their landlords as metrics to become financially free by. These are totally wrong notions! There is a significant difference between an asset and a business, in your progress towards financial freedom, you will need opportunities for capital gains, and opportunities for positive cashflow. The real assets are those that give you passive income!
Next we’ll talk about tips for classifying as assets or liabilities.