Buy Assets, Not liabilities: Part 1

I should start this post by saying that I am not a professional financial guide by any means. So take everything that I say with a grain (or two!) of salt. Yet in my limited financial education I have come across some things that I think are helpful, perhaps even wise, and I'd like to share them.

When I was in high school I had a friend who's Dad was a teacher. Now most teachers aren't rich but they usually aren't poor either, earning a fairly good salary. What fascinated me about this teacher is that although I'm sure he could afford to purchase a fairly decent newer car, he always had a fairly old car. But he had a very nice house. At the time I thought, man, if I was him I'd get a much nicer, newer, and more expensive car, and live in a more modest house. This made more sense to me.

Today, I realize how smart that teacher was. He was choosing to put the lion share of his money into an asset, while I would have put it into a liability. Let me explain.

In simple terms, anything that can puts money, or income, into your pocket is classified as a financial asset. Different people define assets differently, but most would agree that the following are examples of them: real estate, cash, stocks, bonds, mutual funds, retirement funds, bank accounts, debts owed to you. Liabilities are anything that takes money out of your pocket. Liabilities include: mortgages, car loans, credit card balance due, school loans, personal loans, taxes. The typical amount you pay on each of these liabilities is considered your expense related to that liability. Your bank might consider things like a car, boat, or timeshare to be an asset, but they aren't really. They take money out of your pocket and the longer you hold onto them, the less value they have. Eventually they will be worth nothing. Really, they aren't a good use of your money (essential as some might be sometimes).

Buying an appreciating asset is always a better choice then taking on debt to buy a depreciating asset (a liability). People who are wealth-wise buy things (assets) that will make them money, not liabilities that will cause them to lose money. My friend's father made a better decision. By buying an older vehicle, he used the money he saved to buy a home that was more expensive and thus would appreciate more (which it has).

Let's take it a step further. Real estate, though I think isa great investment, is technically not an asset until you sell it. That is unless it is a cash producing real estate. For instance, a rental property that produces $300 in profit a month after expenses would be a cash producing asset.

Let's say a person needs a car. She has the choice between buying a $30,000 car and buying a $10,000 car. The $30,0000 car will steadily depreciate (around $400 a month or so) even as you are paying $400 a month for it and in ten years it will be worth around $7,000. On the other hand you can purchase a less expensive car for $10,000 but put the other $20,000 into a down payment on a rental property. Here in Winnipeg, you could buy a rental property for $80,000 with $20,000 down. If you do your homework you can buy a modest duplex for this much which might cashflow $150 a month after your expenses. In 10 years you will make about $18,000 in monthly cashflow plus your house value will most likely at least double (to $160,000). Total profit at the end of the 10 years is $18,000 in rents + $80,000 in appreciation = $98,000. Sound too good to be true? It's not. It's the power of putting money into appreciating assets, not liabilities. Where are you putting your money into? Hope this is helpful for someone. . .

May Light increase!