Acquire Assets and Let Your Assets Pay For Your Liabilities

In your quest for financial freedom, no matter your station in life, you have to learn to acquire assets and let your assets pay for your liabilities. In other words, your assets should bring in more cash than you spend on liabilities. To be able to practice this, you need to know the definition of an asset and a liability.

Although this has been extensively discussed in a previous post – Financial Freedom: Assets and Liabilities Definition For Everyday Folks, it bears repeating. From an investor’s viewpoint, an asset is anything that puts money in your pocket, while a liability is anything that takes money away from your pocket. End of story. This definition is no respecter of persons or items and does not care whose toes get crushed, or ox is gored. No matter how much something is worth, making you a proud member of Forbes Magazine’s rich list, if that thing does not put money in your pocket, it is not an asset. It only becomes an asset when you sell it, and see the colour of the money. Until then, you are only rich on paper.

So, to rephrase the title, acquire things that put money in your pocket and use this money in your pocket to pay for your liabilities. This means that you are keeping a steady eye on your asset column, making sure that it grows and outpaces your liabilities. Become bullish in acquiring assets, and bearish in acquiring liabilities.

A house is a liability unless it puts money in your pocket. Does that mean we should not buy or build houses? No, you are free to buy or build. BUT, buy/build with your profit, not with your capital. Your assets should pay for your house, not your life savings. A smart investor builds companies (assets), and lets his companies pay for his liabilities. The company buys him an official car, buys him an official residence, pays for his Blackberry and phone bills, sponsors management retreats and board meetings in the US, etc. By the time the company is done (which is all legally tax-deductible), he has precious little to spend his money on. The rich own nothing and control everything. Sue a smart rich man, and find out to your dismay that he has precious little to his name. Everything belongs to the company. Sue a middle-class acting rich man, and you have hit a jackpot. The house, fleet of cars, shares, and investment property are all in his name. By the time he settles the claim plus legal fees, he is virtually cleaned out financially

Knowing the definition of an asset and liability is crucial in your journey to financial freedom. If you mix them up the way most people do, you will buy liabilities thinking they are assets, and find out that your cash flow depends on hard labor, working for money rather than having money work for you through your assets.

Before you pull out your checkbook, pause and ask yourself, is this an asset or a liability?