09 March 2019 AnkitChadha

Understanding Assets and Liabilities - Rich Dad, Poor Dad

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In 1997, Robert Kiyosaki wrote a book called ‘Rich Dad, Poor Dad’ which completely revolutionized the way people looked at achieving financial independence and wealth creation. The book basically talks about how one can become rich by letting their money work for them and what do assets and liabilities actually mean. According to this book, an asset is ‘anything that puts money in one’s pocket’ while a liability is ‘anything that takes away money from one’s pocket’.

 

Hence, by definition, buying a brand new car after taking a car loan is a liability and not an asset, since there’s an outlay of some money i.e. EMI against the car loan from your pocket every month. Similarly, folks who buy a home for own living/consumption by taking a housing loan for a period of 20-25 years, are buying a long term liability where they have to pay an EMI for their home loan, every month for 25 years. How can then a house be an asset?

 

Real assets include things like stocks, bonds, mutual funds, other debt products like FD, RD etc. wherein some money is generated and credited to the person who owns these assets. Similarly, if a commercial property is bought for the purpose of letting out for rent, or if a car is bought for the purpose of being utilized as a taxi (which generates regular income), then these too will become assets and not remain liabilities.

 

The book drives home the point that the rich become richer while the middle class and poor remain middle class and poor only because they do not understand this fundamental difference between assets and liabilities. A middle class person (for example) usually takes up a home loan, a car loan, a personal loan and has credit card bills to settle every month along with other types of liabilities, which create a debt trap for him. He remains in this trap throughout his life, since he keeps buying and owning more and more liabilities, and eventually becomes old and dependent without ever giving himself a chance to become rich.

 

A smart person, who really wants to become rich, will never fall in a debt trap where he has to pay EMIs for the rest of his life. He will also not have unnecessary expenses on account of buying expensive things which he does not need. He will instead save some amount of money from his earnings/salary and invest that money into assets like stocks, bonds, mutual funds etc. where these assets make money for him month after month, every year, even while is sleeping. Add the power of compounding to these small investments, and over time you will see how one becomes extremely rich. You can become rich by either winning a lottery or becoming a smart person who buys and acquires assets. Since the probability of the former is not very high, you know now what to do! Cheers!