Before reading this article, ask yourself a question “What do you have more, Assets or Liabilities?”. I bet a majority will say Assets. Let’s hope your answer will remain the same when you reach the end of this article. Because if your answer will be liabilities then you will seriously need to Re-Think about your future expenses.
The biggest problem with the middle-class mindset is that they confuse liabilities to assets. I come across many people who are very proud that they own a collection of assets which in reality are just liabilities. The root cause of this problem is our education system. Although Financial Education is important, it is still not a part of the school education syllabus. Even if it is taught in some schools then they didn’t teach you right if you still confuse liabilities to assets. I decided to write this article especially for them in hope of changing their perspective towards their so-called Assets. Most people assume their Bikes, Cars, House etc as their assets. They are your assets only if they are fetching you more money than you spend on them, else they are just a bunch of liabilities.
The Asset-Liability concept is really simple. Anything that fetches you more money than you need to spend on it is an Asset, whereas anything which does not fetch you any money but requires you to spend on it is a Liability. For instance, if you use your car for personal use then it is a liability but if you use it to provide cab services then it will become an Asset. A majority of the middle-class people think that their Personal Residence is their biggest asset. It is not until you either give it for rent or sell it. Until then it will generate you bills which make it a liability. I was shocked when one of my friends said his personal residence is his biggest asset even if it drains half of his income for paying the home loan EMI. I had to explain to him that it is an Asset, but not for him. It is an Asset for the bank because it is fetching them money in the form of EMI every month.
One more key factor of the Asset-Liability concept is Depreciation. In simple words, Depreciation means the reduction in the value of an object over time due to wear and tear. For instance, if you buy a Car today and decide to sell it after 2 months then you will have to sell it at a lower price. Your fixed assets such as furniture sets, your luxury items etc are all subject to Depreciation.
The middle class are attracted more towards buying liabilities, mainly not because they need them but just for Show off. Owning expensive things makes them feel Rich and Successful. I had a friend who was saving money from his job in order to quit his job and start a business but finally, when he had enough money, he bought an expensive car because he wanted to create an impression on the society that he is rich and doesn’t need a job to survive. But as he spent a part of his savings to buy a car, he was short of money and had to continue his job for few more months.
I am not against buying liabilities and I am certainly not saying that the rich don’t buy liabilities. But the difference is that the middle class buy liabilities using either their savings or by paying in EMI. Whereas the Rich buy assets first, then use the money generated by those assets to buy liabilities. This is how the rich stay rich even after buying expensive liabilities.
Always remember this “Buy what you need, Stay away from Greed”. If you spend your earnings just to acquire liabilities then they will only generate bills, which will only increase your expenses unless and until you acquire some Assets to neutralize them. You need to understand that Financial Freedom can only be achieved only if you have more Assets as compared to Liabilities. I think now you have understood the difference between the two, so from now on stop calling your Liabilities as Assets. They are not your Assets. I Repeat, They are not your Assets.
So now ask yourself the same question “What do you have more, Asset or Liability?” again.