An asset puts money in my pocket. A liability takes money out of
my pocket.
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.
This is the cash-flow pattern of an asset:
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The top part of the diagram is an Income Statement, often called a
Profit-and-Loss Statement. It measures income and expenses: money in and
money out. The lower part of the diagram is a Balance Sheet. It’s called that
because it’s supposed to balance assets against liabilities. Many financial
novices do not know the relationship between the Income Statement and the
Balance Sheet, and it is vital to understand that relationship.
So as I said earlier, my rich dad simply told two young boys that “assets
put money in your pocket.” Nice, simple, and usable.
This is the cash-flow pattern of a liability:
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Now that assets and liabilities have been defined through pictures, it
may be easier to understand my definitions in words. An asset is something
that puts money in my pocket. A liability is something that takes money out
of my pocket. This is really all you need to know. If you want to be rich,
simply spend your life buying assets. If you want to be poor or middle
class, spend your life buying liabilities.
Illiteracy, both in words and numbers, is the foundation of financial
struggle. If people are having difficulties financially, there is something that
they don’t understand, either in words or numbers. The rich are rich because
they are more literate in different areas than people who struggle
financially. So if you want to be rich and maintain your wealth, it’s
important to be financially literate, in words as well as numbers.
The arrows in the diagrams represent the flow of cash, or “cash flow.”
Numbers alone mean little, just as words out of context mean little. It’s the
story that counts. In financial reporting, reading numbers is looking for the
plot, the story of where the cash is flowing. In 80 percent of most families,
the financial story paints a picture of hard work to get ahead. However, this
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effort is for naught because they spend their lives buying liabilities instead
of assets.
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