Let’s talk about how we spend money. This isn’t some lecture about how you should forego that daily coffee and cut coupons so that one day you can retire. No one wants to hear that. But it is important to understand how you spend your money. Most people earn income from a job, then pay their bills, buy things they both need and want, and only after they’ve done these things, they save what’s left, if any. It’s so easy to get caught up in this cycle of earn, spend, and then save.
If you just go by handed down knowledge and social norms, you might think that owning two vehicles and a home in the suburbs is how you should spend your money.
It’s important to look at how you define your spending. Let’s compare assets to liabilities and shape the way you think about each. Many people confuse assets and liabilities so, let’s start with a simple definition for each.
An asset is something that puts money in your pocket.
A liability is something that takes money out of your pocket.
Liabilities are things like TVs, furniture, vacations, and cars. Assets are things rental properties, businesses, and stocks.
You wan to increase your assets and reduce your liabilities. Rather than buying a bunch of things you don’t need, instead buy an asset that will pay you.
Many people make the mistake of thinking their own home is an asset. Your house costs you every month. You have to pay a mortgage, property taxes, and maintenance on that home. Therefore, it’s actually a liability, and not an asset. Now some might say, yes but one day my home will be worth more than what I bought it for. That’s possible and likely. But don’t let that make you think it’s an asset.
Cars are another think people get held up on. Many people buy a new car every few years, constantly upgrading and “keeping up with the Jones’ ” Some even consider their car an asset because it’s a physical object they have purchased. Cars are most certainly a liability. You have a car loan, insurance, maintenance, fuel, inspections, and repairs.
A rental property is a good example of an asset. Say you own a house that you rent out. After you have paid the mortgage and all of the expenses, you’re left with extra money that goes into your pocket.
Now going back to our daily coffee, I’m not telling you to forego it and other liabilities. Just understand what and how you’re spending your money. Be mindful of assets and liabilities. Collect assets and purchase liabilities with intention. Soon enough, your assets will pay for all of your liabilities and more.