submitted by jwithrow.
Wealth comes as a result of the acquisition of assets. If you want to be wealthy you must do two things:
- Acquire assets
- Avoid liabilities
Sounds easy, right?
Well let’s make sure that we understand the difference between an asset and a liability.
Robert Kiyosaki offers a solid fundamental distinction:
“An asset is something that puts money into my pocket. A liability is something that takes money out of my pocket.”
We would expand upon this distinction by stating:
- An asset is something that will maintain or increase in value over time.
- A liability is something that will decline in value over time.
With this understanding (sans-accounting), we can think of two big liabilities that far too many people acquire thinking that they are assets:
1: Cars
Cars, no matter how luxurious, will lose value over time.
In addition to losing value, cars also carry acquisition and repair costs. When the acquisition costs involve taking on additional debt then the purchase of a car is even more financially damaging.
We prefer to drive a beater until the wheels fall off.
If you must have a nice car, follow Mr. Kiyosaki’s advice and first acquire a productive asset that will provide the cash flow to pay for the car.
2: Currency (fiat money)
Yes, those lovely U.S. dollars sitting in your bank account are actually liabilities.
Preposterous, you say?
Please search the internet for a chart of the U.S. dollar’s value over time and see for yourself.
Or just read our essay on sound money.
The U.S. dollar has lost 98% of its value since 1913 and this trend will continue.
The solution is to trade dollars for assets – do this sooner rather than later while folks still think dollars are valuable.