In order to understand the importance of assets and liabilities, we must first understand the difference. By definition, an asset is something that can produce positive economic value. When it comes to real estate, this means any resource that is producing a positive cash flow and is meeting or exceeding any debt brought on by that resource. A liability by definition is legal responsibility. Again, when it comes to real estate, this is any resource that is not producing a positive cash flow and only requires more debt.
The reason that understanding these is so important is quite simple. It is the difference between making money and losing money. It is money coming in verses money going out. Think about all the items around you. Are they assets or liabilities? Your home, car, any loans you may have, any investments, retirement accounts, etc.? Are those things costing you money or bringing money in?
Now if you are thinking like I was when I started my investing journey, you might be saying, “Well does that mean I can’t enjoy things like a new home, cool car, boat, etc. because they are all liabilities?” The answer to that is absolutely not. Besides, what is the point of all this if we do not get to enjoy all of those things? We just need to look at it from a different perspective. Instead of thinking of assets and liabilities as just two opposite things, try thinking about using them together.
What if we used assets to fund our liabilities? What if instead of going out and buying that boat, we’ve had our eye on, we invest in a rental property that will bring in enough cash flow to meet or exceed the payment every month on the boat? What if instead of buying that new car, we rehab or flip a property and use that cash to purchase the car?
Too many people are drowning in liabilities and do not have the assets to pull them out of the water. By changing our focus and shifting to the idea that we are going to let our investments pay for our enjoyment we can completely change the game and our financial futures.
Big picture takeaway points
Self-reflection questions to think more about the content
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