In my last blog, It Is Not How Much You Make, It Is How You Spend It (read it by clicking the following link: https://thefreedomspinner.com/2017/01/31/it-is-not-how-much-you-make-it-is-how-you-spend-it/), I stated that your house is not an investment, or in other words, it is not an asset. I went on to explain that the only thing that can be considered an asset would be the equity available along with the appreciation of the house throughout the years. But the only way to take advantage of this available equity would be to borrow from the home or altogether sell it. Selling it does not make sense because then you will be living in the streets. And borrowing the equity in the home can be a great thing, depending what you do with the money. If you proceed in using the money on a vacation, then this equity has not become an asset. But if you use it to purchase a rental property, this becomes the path towards creating and building wealth through acquiring assets.
So, why is your house NOT an asset? It is pretty simple if you think of it this way: An asset puts money into your pocket every month and a liability takes money out of your pocket every month. This is what assets and liabilities mean. So if you take a look at your house, there is no revenue stream from it. There are only expenses such as taxes, insurance, electricity, maintenance, etc. These are just some of the expenses you have to operate your home. And all these expenses are being paid by YOU, out of your own pocket. Therefore, if the home is bringing in zero in revenues and all it has are expenses, it means the home runs on a negative cashflow as long as you live in the home. And you will always live in a home because you need a place to live. Going back to the meaning of an asset and a liability, you can clearly see that a home is not an asset because it takes money out of your pocket every month. This means that your home is actually a liability. That is why the only thing that can be considered an asset in your home is the available equity in it, but again, this all depends on what you do with that equity. If you use the equity to buy an asset great, but if you use it to buy a liability, you are simply adding to your list of liabilities.
Let me go through a few assets and liabilities so you can get a better understanding:
Again, assets put money into your pocket every month, so assets come in the form of investments such as real estate and other vehicles like paper assets. Real estate puts money into your pockets in the form of cashflow along with equity and appreciation. The cashflow on rental properties usually starts off negative (unless you find a great deal) but through time it grows into positive territory. But from day one you (or shall I say your tenants) pay the mortgage on the property every month. The capital repaid every month is building wealth for YOU using OTHER PEOPLE’S MONEY (your tenants). And your cashflow gets better and better with every mortgage payment made. As for paper assets like stocks and so forth, the dividends paid to you are similar to collecting rent from a rental property. And the stock price is the value (or equity) you have by holding onto the stock. There is not really anything other than investments that are considered assets, as an asset puts money into your pocket every month. And for me, real estate is the best form of asset because of reasons I have explained in previous blogs. But for other people the best form of assets is stocks. And that is absolutely fine, as long as the person understands the difference between an asset and a liability. Every person has their own preferred asset they like to create and build their wealth from. As long as they do it with the right mindset, they will succeed.
One more thing about assets, which is widely misunderstood to be an asset, is a job. A job is NOT an asset. Now, I know what you will say to me, “But Freedom Spinner, my job puts money into my pocket every month!”. Yes, it does, but what does a REAL asset do that a job does not? A REAL asset puts money into your pocket every month WHETHER YOU WORK OR NOT. If you stop working at your job, the money being put into your pocket every month will stop. However, having a job is something you can take advantage of. And what I mean by that is taking the money you make at your job and buying assets to build wealth. Think of it this way, a high salary may make you rich, but it will not make you wealthy unless you take your money and buy assets, which create and build wealth. You really need to remember that the whole mindset about getting to financial freedom is being able to stop working but yet still have money come into your pocket every month. And the only way to get this done is to acquire REAL assets to create and build wealth.
Now for the liabilities. Many people do not really have a good understanding about liabilities. And this is because they buy things they think are assets but in reality they are liabilities, bringing them further and further from creating and building wealth. We all know about how your home is not an asset, so let us go to another liability which is often mistaken for an asset. Automobiles are NOT assets. I do not care if you have a Porsche, a Ferrari, a Lamborghini or all three and more. Automobiles are simply NOT assets no matter which model(s) you have. Expenses come in the form of insurance, maintenance, gas, etc. Revenues come in the form of zero. Any money when talking about cars is never going into the pocket of the owner. This is a clear sign that automobiles are not assets but just another liability. Other liabilities, which I really do not need to explain (as I hope by now you understand the difference between assets and liabilities) are boats, a house up North (unless you rent it, as that turns the house into an asset), cell phones, computers and tablets, furniture, televisions, etc. I think you get the idea. Liabilities are toys and things you really do not need for you to live, but these are the first things that are usually purchased when someone gets a raise, promotion or bonus at work. And this way of thinking is the normal mindset that most everyone has today.
Buying liabilities is not all that bad. It is actually pretty fun to do. But that depends on where the money used to buy them came from. The mindset is to first buy assets that will grow to generate enough cashflow for you to buy these liabilities. When you want to buy a toy, or a liability, the first thing you should ask yourself is not “Can I afford it?”, but “Do I have the asset available to buy it? If not, how can I get an asset to be able to buy it?”. The mindset is totally different and again, it is the most important thing a person needs to have to be able to create and build wealth. This is the mindset to financial freedom.
There are many other things to know about learning how to have the right mindset. They are balance and financial statements, creating and building cashflow and the differences between financial and academic IQs.
I hope you are enjoying (and learning from) my weekly blogs and I hope you will continue to read them.
The Freedom Spinner