Wednesday, September 10, 2008

Rich Dad, Poor Dad

I've never come across a better definition of an ASSET and LIABILITY than the one Robert Kiyosaki gives : An asset is any item (tangible or otherwise) which generates income and a liability is one which creates expenses.

That's it.

So whatever it is you own, regardless of what it's labelled in an accounting textbook, if it is not generating income, it's not an asset. Worse still, if it's leading you to spend more, then it's a liability.

E.g. your car. Tradtionally, one would call it an 'asset'. But RK'd slot it under a 'liability' because it's taking up fuel costs, insurance fees, road taxes, maintenance, etc. (RK also spends lots of pages trying to convince his readers that their houses are also liabilities, given the amount of debt one gets into via the purchase).

The message of Rich Dad, Poor Dad, if I could cull it all into one sentence, is : Spend your money buying things which generate income i.e. buy assets.

The more assets you have, the more income you'll get, leading to even more assets, more income, ad infinitum. That, according to RK, is what the rich do and teach their kids. The opposite - i.e. spending on liabilities and getting stuck with ever-growing expenses - is what the 'middle-class and poor' folks do (ouch).

So when you get that bonus, instead of blowing it all on clothes or a new watch (all liabilities because they don't generate income), think about putting it into any one of the following:
  • Your Own Business (this could be anything from a worldwide conglomerate to a personal Web-page)
  • Stocks, Equities and Bonds (high-risk so do diversify, hedge, read more, get advice, etc.)
  • Mutual Funds and Unit Trusts (less aggressive but over the long-term the amounts can be substantial)
  • I.Ps', Patents and Copyrights (for the inventor/author types, or if you can afford it, buy one)
  • Rental Income (which tends to pay for and exceed the purchasing loan in the first place)

Money put into these items end up 'working for you' because time brings about the 'compounding effect'. Until one day you can quit your job because the income generated from your assets can pay for all your expenses and liabilities.

And thus, thou art truly wealthy. When your (newly defined) assets run the show for you even after you quit your job.

4 comments:

Barbsie said...

good one mate - have actually come to realise it without reading the book ~ powers of observation on the rich!

btw, someone asked me once if I thought kids were an asset or liability.. what do you think? they sure do fit the critiria of "increasing expanses" :o)

Blogpastor.net said...

Children, by Kiyosaki's definition, are companies we make that are liabilities for the first twenty or so years, and then they start becoming assets for a few short years until they find a compatible company to merge with, and they then become a declining asset very rapidly, and finally become a liability again, when the merged entity births other little companies. ):

Alwyn said...

I think Blog-pastor said it better than I ever could, Barb ;>)

Alex Tang said...

wow, that's the most thought provoking statement about children I have ever heard!