Your house is not an asset

“The world is full of smart poor people.” – Robert Kiyosaki

You are probably scratching your head. I did, when I first read these words. After all, how can a house not be an asset? It has value, right? We can sell it and receive money for it. And in most cases, it’s a family’s main asset as well.

Googling the definition of asset, I get two results:

  • a useful or valuable thing or person;
  • an item of property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.

The Cambridge Dictionary defines asset as:

  • a useful or valuable quality, skill, or person;
  • something valuable belonging to a person or organization that can be used for the payment of debts.

If you ask accountants, bankers, lawyers, executives, etc, what is an asset, these are the answers you’ll get. Almost everyone agrees with these definitions, and that’s why they usually have financial problems.

Robert Kiyosaki has a different definition: “An asset puts money in my pocket”. Very simple, and extremely practical. “A liability takes money out of my pocket”. Most people have financial problems because they don’t really know the difference between the two.

assets and liabilities

It’s been many years since I first read Robert Kiyosaki’s “Rich Dad Poor Dad“, but it taught me amazing lessons that I’ve never forgotten since (and my memory is not photographic). It is one of my favourite books ever, and is also the best-selling book about personal finance of all time. The most vivid memories I have are of the pictures of the cashflow patterns of the poor, middle class, and rich.

Cashflow pattern of a poor person:

poor pattern

A poor person usually spends all he earns, without thinking of saving or investing, and doesn’t plan for the future.

Cashflow pattern of a person in the middle class:

middle pattern

A middle class person earns a salary, gets into debt to buy things he thinks are assets (they’re not) and increases his expenses as his salary increases. A car might have some value, but it doesn’t put more money in your pocket; it only increases your expenses. A house also might have some value, but it also doesn’t put money in your pocket; it increases your expenses (in the form of mortgage payments, property taxes, maintenance, insurance, etc). A rental house can be an asset (if the rent you receive covers all the expenses you have every month) or a liability (if your expenses are greater than your rental income).

Cashflow pattern of a rich person:

rich pattern

A rich person buys assets that put more money in his pocket, like shares in companies, property, businesses, bonds, notes, intellectual property, etc, and then uses that income to buy even more assets. His main sources of income are rent, dividends, interest, royalties, and others (basically making money without having to work). The rich person also tries to buy his liabilities with the income generated by his assets (a residence is a nice thing to have), not from his salary.

If you want to be rich, all you need to know is the difference between assets and liabilities, and then you just need to buy assets. It’s that simple.

All of the above is just a small sample of the incredible wealth of knowledge you will receive when you read “Rich Dad Poor Dad“. I just finished rereading it for the nth time and highly recommend it. You can buy it here.

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