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Assets vs Liabilities | Your House is Not an Asset! (Rich Dad Poor Dad)


August 4, 2020

Camille Gerochi


Assets vs Liabilities | Your House is Not an Asset! (Rich Dad Poor Dad)


On this blog post, you will learn about the difference of assets vs liabilities and why your house is not an asset. Read these separate blog posts about Rich Dad Poor Dad summary, the concept of cashflow quadrant, and types of investors by Robert Kiyosaki.


How Do You Differentiate an Asset from a Liability? 

Introduction | Assets vs Liabilities

Rich people acquire assets. On the other hand, the reason why the poor and middle class do not become rich is because they acquire liabilities that they think are assets. They miss out on buying income-generating assets because first and foremost, they don’t know the difference of assets vs liabilities.

But what exactly is the difference of assets vs liabilities? According to Rich Dad, it is the direction of cash flow that determines if something is an asset or a liability at that moment.

 

Defining Assets vs Liabilities

Rich Dad’s Definition of an Asset and a Liability

What’s the difference of assets vs liabilities?

Asset: “An asset puts money in your pocket.”

Assets vs. Liabilities

Liability: “A liability takes money out of your pocket.”

Assets vs. Liabilities

 

A Realization | Assets vs Liabilities

  • Now that we have differentiated assets vs liabilities, let us dive deeper about the topic. People buy a house and consider it as an asset, when in fact it is a liability. And that is when confusion occurs.
  • Rich Dad specifically mentioned, “Confusion occurs because the accepted method of accounting allows us to list both assets and liabilities under the asset column.”

 

The Truth About Assets vs Liabilities 

“Your House is Not an Asset!”

  • How do we differentiate assets vs liabilities in this scenario? In the book Rich Dad’s Guide to Investing, Robert Kiyosaki explains how this statement is valid through a diagram. 
  • “In this diagram, we have a $100,000 house where someone has put $20,000 cash down and now has an $80,000 mortgage. How do you know if this house is an asset or a liability? Is the house an asset just because it is listed under the asset column?”
  • Let us look into the financial statement to find out if this house is an asset or liability.

Assets vs. Liabilities

  • As you can see, items are listed only under the expense column and nothing is in the income column, which makes this house a liability.

 

Now the Question at Hand is: “How Do We Change a Liability to an Asset?”

  • Let’s refine the diagram.

Assets vs. Liabilities

  • Now you can see that two things are added: “rental income” and “net rental income”. The keyword here is the word “net”. With this, the house is now changed from a liability to an asset. 
  • In order to further understand the concept, here is an example from Rich Dad: “Now let’s say all the expenses associated with this house add up to $1,000 – which includes the mortgage payment, real estate taxes, insurance, utilities, and maintenance. And you now have a tenant paying you $1,200 a month.”
  • If we do the math, you now have a net rental income of $200 a month. Now this makes the house an asset for it is putting money in your pocket.

 

In a nutshell, assets are income-generating items that increase in value over time. The only way a house can be an asset is if it generates income after all expenses are paid. On the other hand, liabilities are items that decrease in value over time, which will cost you more in the long-run.

 

How Does Your Financial Statement Look Like?

Now you know the difference of assets vs liabilities and the reason why your house is not an asset. In order to help you better understand your finances, here is a basic financial statement template that you can fill up!

Financial Statement


Introduction | Rich Dad Poor Dad Summary: A Quick 2-Minute Read

Rich Dad Poor Dad Summary. “The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money… but never learn to have money work for them.” –Robert Kiyosaki

Rich Dad Poor Dad played a key role in my life. That being said, I’m taking this opportunity to share the lessons I’ve learned from Rich Dad Poor Dad – for it has changed my life forever. I summarized the cashflow quadrant concept from Rich Dad Poor Dad series in a separate blog post.

 

The Lessons | Rich Dad Poor Dad Summary

Here is an overview of rich dad’s lessons:

  • Lesson 1: The rich don’t work for money. They make money work for them.
  • Lesson 2: It’s never about how much money you make. It’s how much money you keep.
  • Lesson 3: The rich focus on their asset columns while everyone else focuses on their income statements.
  • Lesson 4: Corporations are the biggest secret of the rich.
  • Lesson 5: Often in the real world, it’s not the smart who get ahead, but the bold.
  • Lesson 6: Work to learn. Don’t work for money. 

 

Rich dad’s lessons can be applied by following a series of steps that are integral to each other.  

 

  • On Financial Education: Invest in your financial education. When I say financial education, this pertains to your mindset and knowledge.
  • On Mindset: Invest a lot of time in honing your ‘money mindset’—know the right way to manage your finances, because then again, it’s not about how much money you make, it’s about how much money you get to keep, and grow.
  • On Making Money Work for You: Invest in learning about the process on how you can turn your hard earned income into passive income through real estate investing. Learn about taxes, reading financial statements, the difference of assets and liabilities, etc.

The end result of these steps is freedom—and when I say freedom, it is freedom in every way possible. Are you now ready to make your money work for you through investing in real estate?

 

Conclusion | Robert Kiyosaki Quotes

One of my favorite quotations by Robert Kiyosaki is ‘Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.’ Let me leave it at that.

 

I know that the philosophies of Rich Dad series served me well. Rich Dad Poor Dad Summary is financial education at its best. Please also take a quick peek at the cashflow quadrant concept from Rich Dad Poor Dad series.

Have you read this book already? I’d love to know what you think about it!

Rich Dad Poor Dad Summary


Cashflow Quadrant by Robert Kiyosaki (Rich Dad Poor Dad)

“The only reason I built businesses was so I could invest in the investments of the rich. The only reason you build a business is so that your business can buy your assets. Without my businesses, I could not afford to invest in the investments of the rich.”Rich Dad

 The cashflow quadrant by Robert Kiyosaki is such an eye-opener. I have applied the lessons that I learned from this concept in my life. While this blog post focuses on the cashflow quadrant topic from Rich Dad Poor Dad, the complete overview of the general concepts from Rich Dad Poor Dad summary are included in another blog post!

  

The Components of the Cashflow Quadrant by Robert Kiyosaki

  • E Quadrant (Employees): These are the people who work from 9-5 for businesses or corporations and follow a certain workflow or system. People in this quadrant come from all walks of lifefrom janitors to presidents of companies.
  • S Quadrant (Self-Employed): These are professionals with formal education and specialization such as doctors, attorneys, engineers, accountants, etc.
  • B Quadrant (Business Owners): Being a business owner means you own a system and people work for you. Having a business will give you the best chance for great wealth and financial success.
  • I Quadrant (Investors): These are people who invest their money in stocks, real estate, small businesses, corporations, etc. Being an investor means money works for you.

 

Different Quadrants, Different Paths

Cashflow Quadrant

Poor Dad’s Advice: “Go to school, get good grades, and then find a safe secure job with benefits.” Poor dad values job security and he holds on to the retirement plan offered by the government. 

Cashflow Quadrant

Rich Dad’s Advice: “Learn to build businesses and invest through your businesses.” Rich dad believes in the power of businesses for it will buy your assets with tax benefits

 

Emotional Differences of the Quadrants

People in different quadrants have different emotions. These differences are crucial for they are triggers/reasons as to why these people fall under their respective quadrants. For example, someone who values job security belongs in the E quadrant, and so on. 

 

Difference in Investment Capabilities

There is a big difference between an employee buying an investment and an affluent business owner buying an investment. Not all investments are available for employees. Meanwhile, there are investments that are available only for affluent business owners—investments that have the least risk with the highest returns. That’s why rich dad says that there’s such thing as ‘investments for the rich’—these people are also known as accredited investors.

Hence, the ultimate goal is to move from the left side of the quadrant to the right.

 

Take a few minutes and ask yourself these questions:

  • Which quadrant do you currently belong to?
  • Which quadrant do you want to belong to in the long-term?
  • What goals will you set to get to that quadrant?

 

Did you like this concept from Rich Dad Poor Dad series? Please also take a quick peek at the summary of lessons from Rich Dad Poor Dad!

Cashflow Quadrant

Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How. 

Stay in touch with us by signing up for our newsletter. The newsletter will keep you up to speed on the current real estate investments we are looking at, provide physicians with investment opportunities, and much more.  

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Authored by Harsha Moole, M.D., MBBS

Hey there! I hope you enjoyed reading this blog. PhysicianEstate is my brain child and passion project. I run this platform to empower entrepreneurially motivated physicians to make financially educated investment decisions and discuss asset protection strategies. Lots of important but free content here and here! If you have any questions or if you are interested in partnering with me, let’s connect! hmoole@physicianestate.com

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