Asset vs. Liability

 


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For most people the idea of asset vs. liability is a blur. It often becomes more confusing when you go to your banker. When you go to the bank to get a loan, your banker asks you to list your assets as collateral to insure you can pay back the money they are about to lend you. What is most commonly listed. . . . house, car, jewelry. . .

This is the single most significant idea that keeps the middle class from becoming wealthy. They purchase long term debt items such as cars and jewelry as their earned income increases, by allowing you to list items that do not bring any kind of revenue into your cash flow your banker is contributing to the chance you are going to default. It is this idea that generates many other problems with a person’s cash flow.

Those that are financially literate understand that an asset is something that puts money into your pocket each month, regardless if you work or not. Such as properly managed rental property or managed businesses.

A liability is something that takes money out of your pocket every month, weather you work or not. This is anything with monthly payments but usually a house, car, or other luxury.

If you get a raise and spend that extra money on something that locks you into an agreement to pay X amount of dollars for X amount of years, then you really have fallen into the middle class trap. By not investing your money into assets you have agreed to continue working for money.

Now that you understand the differences between these two concepts you should re-evaluate your current financial status. Do you indeed have assets or do you have a long term debt obligation for liabilities?

Some people will still argue that they can sell their car or their house to produce a revenue. They are correct but until the point they sell their liabilities off they are not assets and should not be confused with one.

With those ideas in mind we can now resolve many of the problems in the cash flow patterns of the poor and middle class.

The next step to becoming wealthy is to understand the three basic cash flow patterns.

Hello my name is Robert but you can call me Bob, a year ago I made a decision that I would not be a slave to money. This is what I learned.

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