Do you know how to calculate your economic position or even how to record/manage your net worth? Listen to learn how real estate and business investors define assets vs. liabilities.
Hi, Jay Massey with CAshFlowDiary.com with another quick tip about real state and business.
Today we’re going to talk about one of the most basic financial statements ever, the balance sheet.
If you went to a high school like I did, you did not know what the balance sheet was. In fact, you may still not know which is why you’re watching this video.
A balance sheet is simply a record of two things: your assets and liabilities. Here’s the question: why is it important?
Well, one of the things that is important to understand about assets and liabilities is that assets minus liabilities equals that all important number that you hear all the time talking about someone’s net worth. If you don’t know what your assets are and if you don’t know what you owe, this is not something you’re paying attention to these days but learning to manage your net worth is a necessary skill that most of us aren’t taught.
The question is, what is an asset and what is a liability and how can I begin to create my own record?
Well, I am going to give you a very simple definition that was given to me by Mr. Robert Kiyasaki himself. An asset is simply anything, keywords there, anything that puts money in the pocket every month, money goes in every month. And a liability is the exact opposite of that. It’s anything that takes money out of the pocket every month.
Let’s think about some common examples. What would you consider an asset or a liability?
What about your car, do you think that is an asset or a liability? Some of you, depending on the car you’re thinking, “Man, that’s a total liability. I can’t even get the thing to run.” Now, there are also collector cars, right?
But some people would call those assets. Now let me ask you this question. All we’re going to do is apply the same simple definition. Does that collector car put money in your pocket every month or does it take money out of your pocket every month? Do you have to wash it, clean it? Maintain it? Or do you actually use it in some form or fashion to generate income every month?
For most people, what they think of as a typical asset is probably, actually, a liability. Here’s another one.
What about the house you live in? Do you think of that as an asset or a liability? More importantly, what if
that house is paid for? Is it an asset or a liability? Well, let’s again apply the simple definition. Every month, does the house you live in, your primary residence, pay you enough money to pay the property taxes or the insurance? Or is that something that is coming out of your pocket every month? And what you can begin to see is that you might see like I saw the first time I started looking at balance sheets is that I had way many more liabilities that I did have assets. What could be an example of assets, you might ask?
Well, it’s very simple. What about a rental property, is a rental property an asset? Well, maybe. Not in it of itself. Just because it is there and exists doesn’t mean it’s an asset. It could be an asset if it’s rented. Many of us know that not even that sometimes makes it an asset. It can be an asset if it’s rented and therefore, the tenant is using it properly, and most importantly, after they pay the rent and all of the income that it generates, there’s actually money left at the end of every month. That’s what then, can make that as asset.
What could be another form of an asset? What about something simple or kind of a little bit more?
Think about this. Have you ever noticed how sometimes people talk about selling their rights to something? Maybe you have a book in you. Maybe there’s a book that you know you’ve always wanted to write. After that book is written and once you are able to get that published and have it sits out there, does that book continue to produce income in the form of royalties to you? Streams of royalties can be a very, very powerful and good asset as well.
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