Assets and Liabilities.

byHeartshift

1.7K followers

10 years ago

It is very interesting to observe how many people believe to understand money and the sad fact is they don't. And it is definitely not their fold. There was so often nobody available to teach them what should be taught to every child already in the first grade at school. Every child actually knows by nature, that when the pocket money is spent, it is gone. So actually it needs to find ways that it creates itself. Adults often look almost dismissive smiling to the child and explain that this is not possible. Parents often do the rest by reminding the child to save enough and promise if the child is doing good through the month it will get pocket money again at the end of the month. What will the child interpret after such convincing statements? Of course it will adjust and build the imprint, that money is only to get by being good and by saving. This imprint will become a belief and this belief will create behaviour patterns and those patterns will create the reality for the rest of the life. The basic idea to make money out of money is choked off.

Later when the child is grown up it will work and it will do its best to be a good worker to surely get the money. It will save a little amount to buy a house with a big credit and the first liability starts. Then when a family is built so many things have to be bought. Bigger car, holidays in foreign countries and so on. The more the family earns, the more the family increases the costs to live a good life. And also the taxes increase with the income. Every end of the month it is just enough and maybe there is a rest left over to save. This kind of life is called living in the rat race. Although the income increases with the time there is still so much to pay.

What if the child got taught to use the money to create something that gives money again? My son was about 8 years old when he asked me the first time: Daddy you are talking often to people about being employed, self-employed or entrepreneur. What is actually the difference. I must not tell you that I was very proud that my efforts to teach him on a simple way so many ideas about money already since some years were waking finally his interest. And I showed it to him on an example. I said: "look an employed person works for money, for the government by paying taxes and for all his liabilities. A self-employed does basically the same. The only difference is that the self-employed can decide when and how often he does whatever he has to do to generate the money." I made a pause and looked at my son if he could follow. Excited and with sparkling eyes he asked: "And the entrepreneur? What is then an entrepreneur?" I made again a pause and with a considerable breath I told him this: "imagine you ask 11 neighbours to clean their car for 10.- Swiss Francs and then you organize 10 classmates. To your classmates, you offer for cleaning 1 car 5.- Swiss Francs and the other 5.- You keep for yourself. By doing this, you would have in one strike 60.- Swiss Francs. 50.- For the 10 cars, your classmates are cleaning and 10.- For the car you clean yourself." My son started to laugh and could almost not stop anymore and he said: "That easy?" He never tried it, but he understood in this tiny idea, that there are millions of possibilities every day to create something out of almost nothing.

With people who understand to build wealth, it is exactly the same. They spend the main money into assets instead of into liabilities. They buy a car, not with newly earned money. They buy the car with the money they got out of an Asset that gives money. A house is often understood as an asset and it definitely can be an asset. As long the one who bought it lives alone or exceptionally with his family in it, it is a liability. It generates costs and not income. At that moment someone buys it while it is rented already, it generates more money than costs and then it is an asset.

A very important point to build wealth is to understand the logic of cash flow and it is absolutely important to be able to read the digits. It sounds very simple and it is that simple. If it costs money it is a liability and if it generates income from the very first moment it is an asset. Adults often have problems with such a simple definition because they learned that it must be sophisticated and complicated.

Keep it that simple and learn to read the logic of digits and cash flow. To build a sustainable wealth, it is not enough to earn a lot.

Love, Martin