Think in Terms of Assets and Liabilities

Simple definitions: Asset = things that put money in my pocket, Liabilities = things that take money out of my pocket.

Rich don’t work for money, they buy assets and make them work for money. Some examples of assets: house with rental income, paper investments – stocks, funds, etc., car that will be used to bring money to your pocket – like Uber, a small business, etc. These resources can be classified as “tangibles”.

Equally important are the “intangibles”. Degrees and diplomas, skills, professional networks, money spent on upgrading your physical appearance. Then there are also things that boost your morale – like vacations, family time, friends, etc.

It is important to purchase assets and not liabilities. More over, it is important to do this early on. The principle of Compounding is an important one. The Universal law of entropy dictates that time will always increase. Which means that getting an early start will allow assets to compound.

Turn your liabilities into assets. This is challenging to do, but not impossible. Be creative. For example: you have a thick accent. Rather than shy away from public speaking, you could use this to your advantage – speak publicly and be known as that guy with the thick accent. Use this as marketing for yourself and focus on the content you wish to deliver to your audience. This is what Arnold Schwarzenegger did, and the rest is history.

Familiarize yourself with the “Balance Sheet”. The balance sheet will have to balance. On the left-hand side are all the assets you own. On the right-hand side are all your liabilities. Then on the bottom of the left-hand side under your liabilities, is your “Equity”. This is your net worth, calculated by the difference between your assets and liabilities. This should be a positive number. Try to grow this number.

A very simple practical exercise to tie all this together. On a small piece of paper, write all the things that you own. Put this in your right pocket. On another piece of paper, write all the things that you owe. Put this in your left pocket. As long as your right pocket is a bigger number than your left pocket, you will have a happy life.

Sources:

Rich Dad Poor Dad, by Robert Kiyosaki, 1997

Financial Intelligence for Entrepreneurs, by Joe Knight and Karen Berman, 2008