Assets and Liabilities and How They Relate To Financial Freedom
How you define an asset and a liability will go a long way to how successful you become financially and whether or not you achieve financial freedom.
Here are the technical definitions as stated by Wikipedia. I want you to read these, but later we will make our own definitions for ourselves.
Asset – Simply stated, assets represent value of ownership that can be converted into cash, although cash itself is also considered an asset.
Liability – an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.
So an asset is anything that has value that you can sell. So by this definition your car is an asset that you own.
A liability is a debt that you owe that needs to be paid back somehow.
While these definitions are technically correct financially free people use different definitions. Believe it or not but by choosing to define a word differently you can achieve amazingly different results in your life.
If you want to hang on to ‘correctness’ and ‘accuracy to the english language’ then I am sorry but you will have trouble achieving financial freedom.
See the problem is there 171,476 words (approximately) in the english language but so many words mean so many different things.
The New Meaning of the Word Asset
Robert Kiyosaki defines the word asset as:
“Assets flow money into your pocket”
The New Meaning of the Word Liability
Robert Kiyosaki defines the word liability as:
“Liabilities take money from your pocket”
If you want to become financially free you need to adopt these meanings and stop calling anything with some sort of monetary value an asset.
In Other Words
An asset is something that moves you towards your goal of financial freedom, while a liability takes you away from your goal of financial freedom.
A Story To Cement This Idea
I want talking to a friend who owned an investment property and he wanted to be financially free.
We were having this discussions and he was saying “My investment property is an asset”. What he truly meant was “My investment property can be sold in exchange for cash”.
I was saying “Your investment property is not an asset, it is a liability because it takes money from your pocket.”
He responded with “But that doesn’t mean it is a bad investment!”
See just because something is a liability doesn’t mean it is a bad investment.
A negatively cash flow property is a liability up until the point where you sell it to access the capital gains. When you sell it and access the capital gains that property instantly changes from a liability that takes money out of your pocket to an asset that puts money into your pocket
Just because something is an asset doesn’t mean it is a good long term investment and just because something is a liability doesn’t mean it is a bad long term investment.
The Goal Is To Refocus Your Mind
We already talked about the 3 definitions of wealth and if you want to be financially free you need to adopt the definition of wealth that states “I am only as wealthy as the passive income I generate”.
If your mind is focusing on the fact that anything with monetary value is an asset you will be led astray financially and will invest in things that lose you money…like cars. You won’t invest in assets that pay you money, like positive cash flow property or passive income businesses.
So even though we are making a word mean something that the oxford dictionary (or Wikipedia) says it doesn’t we are doing so to improve our lives and create financial freedom in our lives.
Once we redefine these two words we can easily look at acquiring more passive income generating assets and avoid the income sucking liabilities.
Our mind will be focused on the right thing and financial freedom will become so much easier.