“The rich acquire Assets, the poor and the middle-class acquire Liabilities” – Robert Kiyosaki
Do you know what your Personal Financial Statement looks like? Do you own more Assets or do you have more Liabilities? Do you even know the difference? These are tough questions to ask of oneself but they must be asked if you want to live a prosperous and financially abundant life. Many people often say, “I just wished I had more money. If I had more money I would have fewer debts”. Unfortunately, it is the lack of financial intelligence that will led them to incur debt in the first place.
Often, people who lack financial intelligence and make more money through a raise from a job or entrepreneurs who make more money through increase business income from sales, tend to spend more money on liabilities because they think they can afford it! What the Rich know, that the Poor and Middle-Class don’t, is that it’s now about how much money you make, it’s about how much money you keep. If you want to have a financially abundant personal financial statement you must follow Rule No. 1 of Personal Finance: You Must Know the Difference between Assets and Liabilities, and Buy Assets!
What Is An Asset?
Although most economic resources suggest that an asset is anything, tangible or intangible, that can be owned or controlled to produce value, Robert Kiyosaki has a different definition for assets, and I tend to agree much more with Robert Kiyosaki. Simply put, Kiyosaki states that assets are anything that put money into your pocket. Consequently, liabilities are anything that takes money out of your pocket.
ASSETS = $$$$
LIABILITIES = ($$$$)
If acquiring assets is all it takes to have a rich personal financial statement and live a financially abundant and prosperous life, then why don’t people simply buy Assets? Their lack of Financial Intelligence! The Poor and Middle-Class buy Liabilities that they think are Assets. Using Kiyosaki’s definition of assets, an example of this would be taking out a mortgage on a new home. If you go to most bankers they will tell you that your home, which you are paying a mortgage on, is an asset. In all fairness, they are not lying to you. In fact, your home is an asset. The problem here is that they don’t tell you whose asset it really is. The mortgage you are paying on your home loan is putting interest money back into the “pockets” of the bank and your home is therefore THEIR ASSET, not yours.
Manage Your Cash Flow
By now, it should be pretty clear that if you want to have a rich personal financial statement you must buy and invest in assets! The best way to do that is to determine the Assets versus Liabilities of your current personal financial statement. Your Financial Statement is composed of two things:
- Personal Income Statement; and
- Personal Balance Sheet
Simply put your Personal Income Statement measures income and expenses (income in and out) and your Personal Balance Sheet balances assets against liabilities. Serious troubles in your personal financial statement arise when liabilities and expenses exceed income and assets. Below are the Cash Flow patterns of Assets and Liabilities. The top box is a personal Income Statement and the bottom box is a personal Balance Sheet.
Income Pattern of an Asset
Income Pattern of a Liability
Notice that in the Income Pattern of an Asset, Income is generated through the Asset column. In the Income Pattern of a Liability, Liabilities result in Income exiting through Expenses. It is this lack of Financial Intelligence in the correlation between Assets and Income and Liabilities and Expenses that that causes most of the financial struggles in most families.
Below is the Personal Financial Statement Example of someone who is Wealthy and someone who is Poor or Middle Class.
PFS of the Rich
PFS of the Middle Class
Notice that the Rich Buy and Invest in Assets that produce their income. The Poor and Middle Class buy and Invest in Liabilities with income from a JOB that results in their income escaping through the Expense column, causing them to work harder to pay off their debts.
What Does Your PFS Look Like?
It’s time to take a hard look at your personal financial statement and its Asset to Liability ratio. Is your income coming from Real Estate, Interests, Royalties or Internet Business Opportunities or is it escaping as a result of mortgages, consumer loans or credit cards.
Invest and Buy Assets
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Hector:
Great article. Will recommend to my fellow colleagues.
One comment to pick your brain:
“Kiyosaki states that assets are anything that put money into your pocket. Consequently, liabilities are anything that takes money out of your pocket.”
A home is considered an asset (in the long run) because over time the market value of that home should theoretically surpass the purchase price. The home is a liability to the borrower, an asset to the lender, but then should pass on as an asset to the borrower after paying it off.
Hey Noe! Thanks for stopping by and commenting.
In Financial Accounting, YES, a home is an Asset after it has been completely paid off because it can be converted into cash.
However, Kiyosaki doesn’t seem to think so. Kiyosaki states that even though a homeowner has completely paid off his house he/she will still incur expenses that will take money out of your pocket (i.e. property taxes, maintenance, association or community fees, etc) and is therefore always a Liability.
Using Kiyosaki’s definition for Assets, the only way a property can be be an asset is if it produces monthly positive income, as in rental property, after Mortgage, Interest, Maintenance and Insurance expenses have been covered.
Great job on this one Hector. I follow many of Robert Kiyosaki’s teachings and have reaped many rewards form doing so. His concepts are so simple, it’s unbelievable how foreign many of them are in comparison to what we’re taught in school.
It’s all about building assets and doing away with liabilities.
This was a great teaching to share with the world.
JK Thanks for the comment.
I hear you man! I owned the Rich Dad Poor Dad book since the time I was a sophomore in high school. Believe it or not, I never opened it until I graduated college, some 7 years later.
The book was a gift from a fellow co-worker at the time and I something always told me to keep it and not do away with it. I wasn’t big reader at the time.
After college, I finally opened it up and what I read simply blew my mind. It all made sense and I think that at a subconscious level I may have known some of his principles (such as don’t work for money, make money work for you). His books re-affirmed my subconscious and took me deeper into the Mindset.
I regret not opening his book up sooner. I wouldn’t have made some of the financial mistakes that I mad in college but the important thing is that I did open it up. Since then I have become a student of work as well as other personal finance and entrepreneurship authors.
Thanks for the comment JK
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