Assets and Liabilities-Day 20-25 Day Reading Challenge

 

Rule #1: You must know the difference between an asset and a liability, and buy assets.

If you want to be rich, this is all you need to know. It is rule number one. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.

“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets,” said rich dad.

When rich dad explained this to Mike and me, we thought he was kidding. Here we were, nearly teenagers and waiting for the secret to getting rich, and this was his answer. It was so simple that we stopped for a long time to think about it.

“What is an asset?” asked Mike.

“Don’t worry right now,” said rich dad. “Just let the idea sink in. If you can comprehend the simplicity, your life will have a plan and be financially easy. It is simple. That is why the idea is missed.”

“You mean all we need to know is what an asset is, acquire them, and we’ll be rich?” I asked.

Rich dad nodded his head. “It’s that simple.”

“If it’s that simple, how come everyone is not rich?” I asked.

Rich dad smiled. “Because people do not know the difference between an asset and a liability.”

I remember asking, “How could adults be so misguided? If it is that simple, if it is that important, why would everyone not want to find out?”

It took rich dad only a few minutes to explain what assets and liabilities were.

As an adult, I have difficulty explaining it to other adults. The simplicity of the idea escapes them because they have been educated differently. They were taught by other educated professionals, such as bankers, accountants, real estate agents, financial planners, and so forth. The difficulty comes in asking adults to unlearn, or become children again. An intelligent adult often feels it is demeaning to pay attention to simplistic definitions.

Rich dad believed in the KISS principle—Keep It Simple, Stupid (or Keep It Super Simple)—so he kept it simple for us, and that made our financial foundation strong.

So what causes the confusion? How could something so simple be so screwed up? Why would someone buy an asset that was really a liability? The answer is found in basic education.

An asset puts money

in my pocket.

A liability takes money

out of my pocket.

We focus on the word “literacy” and not “financial literacy.” What defines something to be an asset or a liability are not words. In fact, if you really want to be confused, look up the words “asset” and “liability” in the dictionary. I know the definition may sound good to a trained accountant, but for the average person, it makes no sense. But we adults are often too proud to admit that something does not make sense.

To us young boys, rich dad said, “What defines an asset are not words, but numbers. And if you can’t read the numbers, you can’t tell an asset from a hole in the ground.” “In accounting,” rich dad would say, “it’s not the numbers, but what the numbers are telling you. It’s just like words. It’s not the words, but the story the words are telling you.”

“If you want to be rich, you’ve got to read and understand numbers.” If I heard that once, I heard it a thousand times from my rich dad. And I also heard, “The rich acquire assets, and the poor and middle class acquire liabilities.”

Here is how to tell the difference between an asset and a liability. Most accountants and financial professionals do not agree with the definitions, but these simple drawings were the start of strong financial foundations for two young boys.