Accumulate Assets, Not Liabilities
Having nice things in life is a reality one should strive for, it should not be an illusion created for self-gratification.
This chapter will focus on the differences between assets and liabilities and show you how, by accumulating assets and reducing liabilities, you can increase your net worth. This scenario was demonstrated by the example in Chapter 6 (Focus on Investing, Not on Consuming) between Earner A and Earner B. The same item, acquired differently or under different circumstances, can be considered either an asset or a liability. Learn to tell the difference. Accumulating assets and reducing liabilities can also serve as a backup plan or safety net for potential financial hardships. Assets come in two main types: liquid and fixed. Liabilities also come in two main types: loans and expenses. An asset is defined as: “a useful or valuable thing person or quality.” A liability is defined as: “the state of being responsible for something or a person or thing whose presence or behavior is likely to put one at a disadvantage.” For the purpose of this chapter, we will define an asset as anything that increases in value over time or puts money in your pocket and anything that decreases in value over time or takes money out of your pocket as a liability. Assets and liabilities can be tangible or intangible, objects or people, even behaviors or qualities. An accumulation of assets provides you with more weapons for your battle against the obstacles of entrepreneurship and potential hardships, whereas an accumulation of liabilities just adds more obstacles and can exacerbate the hardships. Assets and liabilities consist of:
1. Liquid assets: Cash or cash equivalent: Cash on hand, cash in checking or saving account, money market account, certificates of deposit, trust fund, cash surrender value on insurance policy, inheritance, 401K loan potential. All of these items are, or can be, readily converted to cash.
2. Fixed assets: Items that have monetary value that cannot be readily converted to cash. Items such as real estate, vehicles, loans made to others, personal property, long-term investments, and so on.
3. Loans or debts: These are your main forms of liabilities. Car loan or lease, house mortgage or rent, credit card debt, student loans, monthly living expenses (utilities, phone, water, cable)
4. General investments: Investments, either tangible or intangible, should be chosen with the specific goal in mind of accumulation of worth. Does your investment in that product, service, or relationship lead to increased worth? If it does, it is an asset; if it does not, it is considered a liability.
5. Consumables or personal possessions: Items that you buy or use up. They can be considered either assets or liabilities, but are mostly liabilities. We, of course, must consume goods in order to live comfortably, and I am not referring to items purchased for nourishment or necessary for survival. I am talking about the discretionary items we want to possess, as opposed to the necessary items that we need to possess. The amount of goods we consume, and the type and quality of those goods can make a big difference to our net worth. For the purposes of this book, let us call items that do not maintain their value, or lose value over time, and have no resale value, as Type L (L for liability) consumables. Items that maintain a high percentage of their resale value, we will call Type A (A for asset) consumables. Neither of the two is considered assets, but Type A consumables will maintain some value over time, so we will call them assets for the purpose of this book, and Type L consumables, we will call liabilities. An example of how to take advantage of this distinction in consumables is to suppose you purchase a home and fill it with cheap furniture; the odds are, over time, that furniture will become worthless. Let us say, however, that instead you buy high-quality furniture or antique furniture; over time, it could maintain a high percentage of its value, or in the case of antique furniture, it may actually increase in value over time, providing value to you at a later date while still serving the same purpose as the cheap furniture.
6. Business ventures: Businesses can be either assets or liabilities. One year, your business venture can be an asset (revenue exceeds your expenses), the next year it can be a liability (expenses exceed your revenue). There is also the strange example of how a business venture that portrays a liability on paper can be an asset for tax purposes (sole shareholder s-corporation). See Chapter 11, section on profit management.
7. Houses: A house can be either a fixed asset or a liability. Learn to buy your homes wisely. Refer to Chapter 6 (Focus on Investing, not on Consuming) on investing in real estate for an example of how a house, if bought wisely, can be an asset. Conversely, if you buy the nicest, most expensive, house in the neighborhood or spend more on your house than it is worth, based on the current real estate market or comparable sales figures, it will be considered a liability.
8. Cars: A car can be either a fixed asset or a liability. I recommend buying your car and keeping it for the long term, a minimum of six years. Refer to Chapter 6 (Focus on Investing, not on Consuming) in the section that discusses Earner B for an example of how your car can be an asset and how if you purchase your car and keep it for at least six years, that can lead to savings that will allow you to accumulate more assets. Conversely, if you lease your car or buy a new car every three years, your car will be considered a liability.
9. Collectibles: Collectibles, by definition, are assets. Items that increase in value over time. Items such as precious stones, antiques, art, precious metals, and so on. These items are typically purchased and kept for their long-term appreciation potential.
10. Yourself: Based on how you act, you can be either an asset or a liability to yourself, your growth potential, and to your company. You represent and are the personification of your company’s brand. You need to do everything in your power to continue to learn and better yourself to enhance your brands’ image. See Chapter 12 on create and cultivate your brand.
11. Your relationships: Similarly, the people who you surround yourself with can be either assets or liabilities to your growth potential and well-being. You want to accumulate friends, associates, and business partners who can be considered assets. When you embark on the challenge of entrepreneurship, you will encounter many hurdles and obstacles that will require support from not only your family but also from your friends, associates, and business partners. A friend, associate, or business partner who exudes negativity and does not support or believe in you is a liability. On the contrary, one who offers positive support and constructive advice is an asset. Learn to identify which of your friends, associates, or business partners you can classify in the asset column or category and accumulate as many of those as you can and reduce, as much as you can, the ones you would categorize in the liability column.
We, as a society, are accustomed, trained, and judged based on how much stuff we accumulate. How nice our stuff is compared to the stuff of others. We are bombarded with constant advertisement designed to entice us to consume more and more. It is easy to fall into the trap of overconsumption. I would advise, however, that it is okay to consume items for pleasure, but find creative ways to do so, and do so by consuming items that are considered assets such as those listed earlier (art work, collectibles, fine jewelry, and so on). The problem is that most of the stuff we consume are liabilities that do not increase our net worth, but instead they increase the net worth of others. Before you purchase a product, other than the obvious daily required consumables, ask yourself the question: Is this an asset? If the answer is no, ask yourself: Is there a comparable alternative to this product that is, or can eventually be, considered an asset? Entrepreneurs, almost always, make the wise choice.
Another item to consider, which is one of my pet peeves, is the idea of renting or leasing versus buying or owning. I hate to rent or lease. Sometimes, you cannot avoid it, but if you can, never rent but instead buy and own. When you rent or lease, you are making someone else’s entrepreneurial dreams come true at the expense of, or to the detriment of, your own. You are accumulating liabilities, not assets. Absent a tax write-off for a business; buying is the way to go, and that holds true for property as well as vehicles, in my opinion.
One final piece of advice on why it is extremely important and beneficial to accumulate assets and reduce liabilities is to use them as a safeguard or safety net for any unexpected hardships or as mitigation from potential injury as a result due to undertaking risk. I discussed such a situation in my life, in Chapter 5 “Do Not Be Afraid to Take Risks” in the section on how the accumulation of assets can serve to mitigate risk and how it came in very handy for me in my life. It is a lesson that I cannot stress often enough as a way to have a backup plan and safety net for troubled times that can also serve to increase your net worth over time. So, remember, accumulate assets, not liabilities inclusive of the tangible and intangible variety.
Chapter 7: Accumulate Assets, Not Liabilities
Recommended Activities
1. Write down a list of all your assets, and break them down into fixed and liquid (A).
2. Write down a list of all your liabilities (L).
3. Find out what you net worth is (A minus L)
4. Create a spreadsheet of your net worth that lists all your assets and liabilities as well as your expenses.
5. Create a budget that meets your needs and see how much is leftover to accumulate more assets.
6. Make a list of all anticipated major expenses in your near future and identify any available alternative options that can provide more or better appreciation or value in the long run and consider your options.