If you’ve ever consumed any form of content on monetary wealth (and how to amass as much of it as possible), you’ve most likely come across the terms “assets” and “liabilities” – and perhaps even learned a thing or two about why they’re so important, the power they possess when combined with the compounding effect, and how they can quite often be the difference between a mediocre and highly rewarding lifestyle down the line.
So, why is it that only a select few actually see success or even implement what has become seemingly common knowledge nowadays?
My theory: Most people have something I like to call Over-Informed Stupidity Paralysis. There’s just so much misleading information by self-proclaimed “gurus”, social media, and even mainstream media to the point where it’s extremely difficult (if not impossible) to filter out fact from fluff or straight-up nonsense, let alone act on the right information, leaving people mentally “paralyzed” or worse. Sound familiar? Let’s put an end to this by taking it back to the basics and diving deeper into a few seemingly simple terms to figure out what really makes the rich and wealthy tick differently.
First Off, What Even Is an Asset?
By definition, an asset is a “useful or valuable thing” … thanks Google.
While this might make real sense to someone who has a true, unexaggerated understanding of the words “useful” and “valuable” in correlation to their reality, most people actually get it painfully wrong. What most people don’t understand is that, while some general rules might apply universally, everyone’s unique intentions, preferences, and end-goals play key roles in what one can call an asset vs. a liability. Simply put, what works for one person might not bring the same result to everyone equally.
For guidance, I like to resort to my Golden Trio for Assets – a 3-rule system developed over years of failure and success that I keep in mind when assessing whether something is indeed an asset:
- Assets are everything and anything that provide immediate or delayed (future) increase in value to you and your life greater than the initial and future input.
- Assets are not exclusively linked to financial value and return.
- Assets do not have to be tangible (e.g. investment into education).
As crazy as it may sound, even the most commonly propagated and praised “asset” to date such as buying a property in a thriving neighborhood might actually be a stressful, life-destroying liability to some. In the same way not everyone wants to live with 5 roommates in a 2 bedroom apartment in order to save on rent, not everyone is built to put up with the burdens and strict long-term responsibilities that come with buying a home – especially as a young adult with debt and limited immediate resources. Yet, time and time again you see it happen … a young couple buys a home together that’s way out of their budget just to stress out about the mortgage payment at the end of every month, utility bills, tax, and repairs. All resulting in working jobs they don’t particularly enjoy, spending time in places they don’t like, eating food that isn’t good for them, exercising way too little, and oftentimes fighting to keep a broken, miserable relationship alive just to not “lose it all” – slowly letting the so-called “rat-race” lifestyle swallow them alive. All this for a 15% annual property growth rate on a beat-down home in a neighborhood that isn’t even that nice. Doesn’t sound like a bargain to me, yet I’m almost certain you yourself know someone who matches this profile quite accurately.
And on the other hand, there are people that own twenty properties by the age of 26 and are living their best life on a beach in Mexico.
As with everything in life, this is why it’s so crucial to always define whether the opportunities presented to you aren’t actually detrimental liabilities in disguise when considering who you are and where you want to be five, ten, or even twenty years in the future.
What Is a Liability?
As we’ve come to realize here, liabilities can often disguise themselves as assets if one does not pay adequate attention. Now don’t get me wrong, I’m not preaching the minimalist lifestyle as some do. Besides, I myself have a few luxuries I enjoy that can’t really be classified as assets – such as an abundant amount of shoes, perfumes, and jewelry, just to name a few. Life is all about finding fulfillment in balance. However, it is important to be able to recognize the difference and know when you’re investing your time, energy, or money into liabilities and make sure these never exceed your assets – hence, the first rule in my Golden Trio for Liabilities:
- Never let liabilities exceed your assets in terms of current and future overall value
- Be strict and clear when it comes to labeling your liabilities
- Watch out for the second- and third-order consequences of liabilities (also known as the compounding effect)
For a bit of clarity to the third rule, imagine you buy a brand new 4K resolution mega TV. Might not seem an obvious liability at first as you think about the years of enjoyment it will surely bring you while you use it to watch your favorite shows on a daily basis, right? Wrong. As a second-order consequence, watching TV for hours every day can have a serious impact on your mental and physical health, potentially leading to severe laziness, obesity, and even depression as third-order consequence. This is obviously an abbreviated and potentially exaggerated example, but at the same time not too far from the reality many are a victim of today.
The Compounding Effect
The compounding effect is one of the most powerful, yet most commonly ignored principles of wealth accumulation and asset management. Furthermore, people don’t seem to realize that things can compound two ways – both when it comes to liabilities and assets alike.
Not taking into consideration the lifetime of a decision is one of the biggest mistakes people make, not only when managing their assets but also in life as a whole. Similarly to the aforementioned example where we talked about the potential detriments of purchasing a TV, many of our day-to-day decisions have a ripple effect on other actions we might be taking throughout the day as a result. I know this might sound scary at first, but in a strange way, looking at actions and decisions from this angle can also help us regain some level of power in our day-to-day lives – such as the ability to consciously mold our future, with intention. Additionally, considering the potential order of consequences that follow each and every decision can suddenly make the outcome that much more simple, understandable, and clear – whether it be financially or otherwise.
I’m hoping all of this shines a bit of light on personal asset management for you and helps you guide your future decisions with more clarity and ease … however, if there was just a single thought I’m allowed to leave you with today, it would be: Avoid blindly accepting what the majority preach, for this has been the downfall of many – trust yourself to form your own opinions that lead to actions with your personal goals and aspirations in mind.