In the article The persons responsible for changing our Investment life i did not mention Robert kiyosaki. He is the author of Rich Dad Poor Dad. He introduces a very interesting way of explaining the difference between Assets and liabilities and how does the “poor”, “middle class” and “rich” people think about money. He did all this in a very simple way that is probably the reason why the book is so well known. The problem about him and the main reason i did not refer to him previously is because after that book he took a path that I do not like and that did not bring much value.
Nevertheless, we will divide this article in two parts, first what is the difference between an asset and a liability? Using the concept in the book previous referred an asset is something that “put money in your pocket” and a liability is precisely the opposite. Let’s move on to same examples and how they can be considered one or the other. A car is an item that you buy with or without credit, that both, have maintenance costs and depreciation, so in most cases is a liability (most cases?).
I refer to most cases, because it is possible to transform a car in an asset. If you run a renting company and after all costs you are earning money, then the car in this business model is an asset. But almost every time a car is a liability. Next example, cloth, nobody can live nowadays without it, but it is clearly a liability. Unless you buy them to resell at a higher price and it becomes an asset. The final example is our own home, there are maintenance costs so (although it statistically appreciates in value there is much more things to evaluate here) it is a liability. This is truth if you do not rent a part of your home, if you do it, it becomes an asset.
With this three examples in mind you can start to draw a conclusion. Everything (general purpose idea) you buy to personal use are liabilities. When you buy something that overtime appreciate in value or pay dividends (in some case both) you have assets. Sometimes the difference is hard to see, in order to make it easy follow this rule (you can and should go through the math):
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The next step is to introduce the way the three classes mentioned above think about and work with money. Let me start with the “poor”, they hardly make money to survive, and if they want something to change, they have fight hard. They spend all the income they have in basic needs such as food, groceries, rent and utilities. They drive the old cars not as an option but because they have no choice.
The “middle class” earn more money then the "poor", usually attached to the income of having “specialist” job, such as: doctors, pilots, politicians, lawyers and others you certainly can think of. The problem with this class is that they have a good income but they spent it in liabilities. They are always waiting for the next big car, the next cell phonen, and most of them leave of their "rich image". They buy better cloth and have all they’re kitchen equipped with “stuff”. We can resume the “middle class” as persons with a good income but that spend it on liabilities.
The big different between the “rich” and the ”middle class” is that the first do not buy liabilities, they buy assets. They buy the cheap car, not that they need to, but because they choose to buy assets that later will buy the car and a lot of other things without touching the principal (money invested). The ultimate purpose is that our child can take the right path and hopefully reach the "ritch" class (we all desire the best for our children).
Mr. Fergus