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Key To Becoming Rich: Build Up Assets, Reduce Liabilities

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Become RichOf course everybody wants to wake up everyday with more money in their bank account then when they retired to bed the night before.  It seems as time goes on, the youth of the world are wanting more and more, but willing to work less and less.  Even myself, being rather young, find myself spending more time outside of the office than I remember my own father doing so.  They say this young generation is likely to retire in their 40’s, compared to the usual 60’s of the current.  Well, unless you’ve inherited a trust fund, won the lottery, or are a burglar, some sort of work is probably in your future.

It is not my intent to discuss which career choice to pursue, as I talk of that in choosing a career.  However, it is to discuss some important principles about spending money and how what you use your money for can indeed make money in your sleep in the future.

The thoughts provided in this post were inspired by one of my favorite books, a best-seller, Rich Dad, Poor Dad, written by Robert T. Kiyosaki.  For anyone looking for some great tips or spending strategies, this is a must read.  Although, I sometimes don’t enjoy “feel good”, short-term motivating books, this is one that has stuck with me throughout the years.  I am going to expound on the main principle he discusses in the book.

I have worked a few sales jobs in my past that pay mostly based on commission.  These jobs can be very rewarding if you are successful in selling your product.  At these jobs, I would see the “top producers” and I knew the numbers they were doing and the money they were making and thought, “wow, they must be living the high life.”  They would drive up in their Mercedes or Ferrari, get out of the car in their new, crisp, Armani suit.  Then, they would closely glance at their glittering Rolex around their wrist and enter the building.

However, when tough times hit in the economy, many of these same guys were some of the first to fail and lose everything they have.  How can this be?  They were making so much money.  Examples like Mike Tyson, Michael Jackson, and M.C. Hammer should be enough to show you that no amount is ever too much to be lost.

So, what is the problem?   How do they go from hero to zero in such a quick amount of time.  The answer is the principle Kiyosaki talks about, Building up your assets and reducing your liabilities.

Cash is the number one asset you can have.  It is immediately liquid.  The more “cash” you have, the more spending power you have.  It is always wise to have a fair amount of cash on hand as there are no substitutes for it.  Now with this cash, you have pretty much  four options.

  1. Save the cash
  2. Invest the cash in an income producing asset
  3. Exchange the cash for something of equal value (buying something)
  4. Use the cash to buy an incoming draining liability

Save the cash

This is probably the most obvious.  You can choose to put the cash under your mattress and do nothing with it.  Over time, due to inflation and the time value of money, the amount of cash will be worth less over time and have less spending value.  This is a neutral movement on your balance sheet.

Invest the cash in an income producing asset

With this cash, you can choose to put the money to work and invest it to increase your assets.  This can be as easy as putting the money into a savings account.  It can also be investing in a joint venture or investing in stocks.  The goal is to increase your current cash level to more in the future.  You can look at different investment vehicles in our investing section. This should be a positive movement in your assets column.

Exchange the cash for something of equal value (buying something)

This is as simple as buying book or game.  It acts as a vehicle of exchange for something.  This is usually a neutral movement on your balance sheet as the good is of equal value as the cash.

Use the cash to buy an incoming draining liability

This can be a bit complicated and can be easily misunderstood.  Many people will take this money and put it into what most would perceive as an asset, but can easily be considered a liability.  These can be houses, cars, boats, or any other big ticket items that requires a loan to complete the purchase.  These are to be considered liabilities, because all of a sudden you went from having no outgoing monthly payment and pile of cash, to no cash and a big monthly mortgage that will drain your income in the future.  Sure, you can argue that your house has value and is required to survive.  That may be true, but you also inherit a big monthly payment that doesn’t go away for a while.  This has a negative move on your balance sheet.

Now I’m not saying that buying a house or car is foolish, I’m just making it aware that it will become a financial burden on you.  If you are not prepared for this burden, maybe the timing isn’t right.  I discuss this principle further in another post.

Cars can be one of the worst income draining liabilities.  As soon as you drive it off the lot, it loses value.  They are a luxury.  Sure, you can give whatever reason why you need that specific car.  I need the supe’d up truck for the bad road conditions or for moving.  Or I need that BMW for my job and to impress my clients.  Whatever, the case be aware that these big ticket items can slow your progress to becoming financially free.

I urge young people to be methodical in what you buy.  TV and movies have helped created a sense of entitlement for the youth of America and has given false ideals of what is important.  People want to have that convertible in college now or that big house in their 20’s.  Sure, we all enjoy these things, but maybe I can share something that you can think about.

If you take the money you earn early in life, before you start a family and in your early years of marriage and invest that money into income producing assets, you will open doors that will provide you these luxuries at a much lesser cost to you later in life than if you buy them when you’re young.  By investing, you can use the income that is generated from your investments to fund your “toys.”  That way, you never have to dig into that base cash that you started with.  In time with appreciation, that little amount of cash can turn into a huge estate.  It is all about where you spend your money and how you build up your asset and liability column.

The point is to try and build up our assets as large as possible and minimize your liabilities.  Don’t be sucked into the Rolex, Ferrari lifestyle early on in life if you can’t afford it.  Drive that beat up old car a few years longer, or rent that house a bit longer.  If you are able to hold off, invest that money, you will find that you will have a lot more freedom to buy the things you want, without straining your main source of income.  Trust me, not every job is guaranteed and every salary set it stone.  When times get tough, which they will, you will be glad that you were frugal with what you purchased.  This can be a huge stress relief and can alter your whole life dramatically.  This simple principal is huge in finding success and financial freedom.

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