Know what makes you money. Whenever you receive any income from your wages or salary or any other source such as a gift, you are faced with a choice, and the choice you will make will mean the difference between achieving financial freedom and staying trapped in the rat race. It’s a choice that anyone can and does make every day, from the poor through to the middle class right up to the rich and the ultra-wealthy. The option is whether you’re going to use the money you’ve just received to buy an asset or spend it on a liability.
So, what’s the difference? Essentially, an asset is something that makes you money. Assets include things such as real estate that provide you with a rental income each month. Stocks and shares that give you regular dividend payments or precious metals like gold and silver can be bought and sold on the open market for capital gain. On the other hand, Liabilities take money from your pocket when you buy them but don’t give you any money back. In fact, it often continues to make money through maintenance and servicing requirements in the long term.
Liabilities are anything you buy and consume, such as food, fuel, vacations, cars, and other day-to-day expenditures. They also include our significant commitments, which typically include credit card debt, personal debt, the mortgage we have at our home, or the rent we pay to our landlord. You can also add to the list of liabilities anything you buy and later sell on at a loss or simply throw away. Most high tech consumer goods that we spend so much on, like computers and TVs, fall into this category—each time you do that, you’ve just lost money.
Of course, some of these liabilities are just an essential part of living. Of course, some of these liabilities are just a necessary part of living. We can’t do without food or clothes, for instance. And if you don’t want to live like a hermit, then the occasional luxury keeps you sane. But all too often, we consume things through habit or to impress our friends with must-have items that we don’t need at all. However, while the poor and middle class focus on using income from their jobs to buy liabilities, the wealthy focus on buying assets that will generate more and more cash.
They concentrate on building up their asset base by acquiring real estate, creating a portfolio of stocks and shares, or setting up businesses that others run to provide them with passive income streams. This is the great secret to building wealth. And there’s a tactic that you need to adopt if you achieve similar financial freedom for yourself. However, most people don’t think that way, and they never confront the reality that they’re burning money as fast as they’re generating it.