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Understanding Assets vs. Liabilities: Increasing Wealth

Hey it’s Sasha Evdakov, thanks for joining me here at backstageincome.com where I share with you some insight on how money is made behind the scenes in your business and also your life.

In today’s lesson, what I’d like to do is give you some metal insight on how you can increase the money that you have on a day to day basis, week to week basis or month to month basis by simply changing your mindset, by simply changing the way that you think about acquiring or purchasing things or getting things when you actually earn and accumulate some cash.

If you’re already working, if you’re already making some money, you use that money to purchase things, to acquire things, to put that money into something. So I want to share with you a simple, little exercise that you can do at home in order to develop the way that you think about where to put and allocate your money.

What if you had a million dollars?

What I’d like for you to do is go ahead and pretend that you have one million dollars. So you’re given this money, one million dollars, and now you can choose to do whatever it is that you want to do.

What I want you to do is go ahead and just make a list of 10 to 15 things that you would buy with this million dollars. Go ahead, make your list now.

Here’s a quick list that I’ve made up, just for discussion purposes that we can now use to talk about and evaluate.

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Many times, what I see most people doing is writing down things like a brand new car, such as a BMW, a new camera, could be things like a new house, a new phone, maybe a new suit, so you look good, or more clothing. It could be things like stamps, because you’re interested in stamp collecting. It could be a jet ski, so you can have some fun out on the water. It could be a watch, Microsoft stock and some gold coins.

This list has a fairly good amount of variety of things that we can use to discuss. So the next thing that I want you to do is go ahead and draw a line down the middle of another page or a new page.

What you can do is draw anther line, kind of like a T line right here, and then on one side what you’ll do is write “assets” and in the other side you’ll write “liabilities”. I’m going to use “A” and “L” for assets and liabilities.

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Assets vs. Liabilities

What I want you to do is start moving these things into the assets or the liabilities. How do you determine this? What’s an asset and what’s a liability?

An asset is typically something that appreciates in value over time. And a liability on the other hand is something that depreciates in value over time.

If you’re spending your money or putting your money into liabilities, things that actually depreciate in value over time, this could be one of the things that is really hurting your finances or your bank account.

Focus on the things that appreciate over time

If you’re looking to improve the funds or the money that you already have, it’s best to focus on the assets and best to focus on things that appreciate in value.

This won’t always give you the most fun in your life, this won’t always get you the jet ski or the brand new car or BMW, but it allows you to stay stable a understand what is it that you’re buying these things for.

If you’re earning more and your earning power is much higher and you have a really high earning power, then of course you can go ahead and buy your BMW, get your jet ski and get your brand new phone and nice fancy suit.

But until that point, until you have that discretionary income to where it doesn’t really matter, then you can go ahead and focus on the things that appreciate in value.

This is how millionaires do it

For some people, in fact, I know quite a few multimillionaires that still don’t really go for some of the things that are liabilities, and that is because it was preprogrammed in their mind and that’s how they became and got to that millionaire state.

In fact, I know some millionaires who walk around with holes in their socks. And I know that may seem a little weird, but because their mental state, because they’ve been preprogramed and structured to live and focus on the assets, this is one of the things that helps them preserve their financial bank account.

Let’s take a look at which ones are the assets and which ones are the liabilities. What I’m going to do is circle some of the things that may be assets and cross out some of the things that may be liabilities.

Liabilities

When we talk about some fancy things, a car, like a BMW, it’s definitely a liability. So a car would definitely go in the liability state.

Most people want a fancy new car because they want that social status, because they want to look good. The same thing with that suit. A lot of times people want a fancy suit because they want to look good. The fact is that you can get good suits, discounted suits, still fairly good priced, if you shop around and if you need it for your job then you can get one at a lower price and you’ll still look fairly good, this just may be not a $5000 suit.

The new phone is typically another liability, it’s not something that you really need up until multiple generations later, until your phone really stops working, or in fact, you could just use a basic prepaid phone, rather than a really high tech smartphone.

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The same thing goes with the watch, that’s just something to look good, and you also have the Jet Ski, that’s just for fun, but it depreciates in value.

Your camera could be also another liability, because if you have a phone, even if it’s an older phone, you can still use the camera off of that.

If you’re using it for your business, this could be in part an asset, if you talk about accounting terms. But really the value of that camera still continues to go down. So it typically does not appreciate in value over time, so I’m still going to mark it as a liability.

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Assets

What are the things that will increase in value? It’s basically going to be your house, the Microsoft stock that you purchased, some gold coins, and potentially stamps, even if you have a hobby collecting stamps.

What I’m going to do is put these over here, because they are the assets.

These assets typically increase in value over time, so if you’re collecting stamps, typically they hold their value, it’s an antique, they’re rare, so you can trade them. Similar to how you can do with gold coins, again, those things are collectors’ items.

You can do the same thing with antique cars, but in this case, we talked about a car that’s a BMW, which will typically depreciate in value over time, unless it as an antique car, of course.

Microsoft stock, again, we’re looking for appreciation or dividend growth. We’re looking for a house, and a house typically will appreciate in value over time, just because of land value.

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These are the things that you are going to get in order to increase your value, these are the assets, whereas all the things over here, these are the liabilities, and these are the things that will drain your bank account, these are the things where you lose money.

If you’re looking to preserve your capital, if you’re looking to grow your money, then you want to focus on the assets. Any time that you get a dollar, think about it, is that item that you get or use with that dollar going to be increasing in value, or is it going to be decreasing in value?

Once you start changing your own personal mind, this brain right here, and you start adjusting it to start thinking about your assets vs. the liabilities, and you start thinking, what’s going to happen to that dollar? is it going to be an asset? Or is it going to be a liability when I do something with this dollar?

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Then that’s when you start to grow your money a little bit more. That’s when you start to really invest in the right direction, that’s really when you start to accumulate more wealth over time.

Hopefully you got some good insight about where to put your money and how to really start thinking about where your money is being spent, or where your money goes.

If it goes to a liability, that’s where your money is going to die and depreciate. In the end you become left with less and less cash, whereas if you’re constantly putting your money into assets, things that appreciate over time, then your money will grow.

Resources & Helpful Tools

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[thirstylink linkid=”5857″ linktext=”” class=”afflink” title=”Start Trading Stocks”]

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On MyLittleNestEgg.com we try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions.

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