Length: Less than one page
Keywords: Wealth management,financial advice
Though I’m desperately missing a high end multi media device to capture image, listen music and for other entertainment activities, I’m repeatedly suppressing my temptations to buy a high end mobile phone with camera and music player. While I can afford to buy a 20K gadget, what’s preventing me from spending money is the concept of Asset vs. Liability.
What is asset and what is a liability?
Understanding this concept of Asset and Liability is the primary need for any wealth management strategy. You should be able to differentiate what is an asset and what is a liability and focus on building asset first.
Any investment/spending, which, over a period of time pays for itself and starts generating additional value are assets. On the other hand, if you need to keep spending again and again on an object, it is a liability.
For example, a house is a liability if it is unoccupied and you keep spending on it in for tax, maintenance, insurance etc. If it generates money/saves money in terms of rent etc, then in becomes an asset.
A mobile phone is never an asset, unless you use it for some professional purposes and earn some money. A bike is an asset if it results in savings compared to money you might have spent for Auto/Bus etc. Knowledge is an asset as you can use it to earn money. Hobbies like drinking and smoking are liabilities as you keep spending on them and never get anything back in return, except diseases on which you’ll have to spend again.
Robert Kiyosaki’s Rich Dad Poor Dad is a wonderful book for those who wish to know more about wealth management.
At the beginning of our career, we should focus on building assets, which over a period of time, start generating additional revenue and offset the dependency on primary revenue source. If we spend all money on liabilities, the savings will drop and pressure to work hard and earn more will keep increasing. We’ll work for company to earn salary, we’ll work for Government to pay tax, and we’ll work for bank to repay the loan. We’ll never be able to work for ourselves. Investing in assets, on the other hand, will ensure that your money works for you, even if you stop working for money.
Not that we should never indulge in little luxuries life has to offer, just that we need to be cautious in our spending habits. Living in an otherwise spendthrift generation we should understand that savings has advantages other than tax avoidance as well...
Related: Work as an independent Consultant, If you can