The Difference Between Assets and Liabilities
Video transcript below:
What’s up, ladies and gents? Colin Stuckert here, the Wild CEO.
It’s been a long day, so I’ll keep this short. I want to do a quick definition of assets and liabilities.
Now I know many of you may follow me for my nutrition, lifestyle, health, et cetera. But financial health is something that matters too; we all take on debt, we all buy things, and we all have to manage our money, so this applies to everyone.
And I would recommend that, at the very least, understanding the differences between an asset and a liability and then, plus one other bonus thing that’s a liability that people think is an asset, we’ll talk about that as well. So let’s get to it.
Okay, so what’s an asset, and what’s a liability? If you haven’t read this book, get Rich Dad, Poor Dad by Robert Kiyosaki.
Now here’s the perfect example of how insane our culture can be at times. This guy talks about financial wisdom and financial thrift, and financial intelligence. That’s the word he uses. He uses financial intelligence, right?
To talk about the very basics of profit and loss, for not just business but for your own life, from assets and liability, things that put money in your pocket, that take money out, et cetera, and he’s had so much hate over the years, it’s insane.
Like people trying to discredit him saying he made money in real estate when there was an opportunity as if that has anything to do with the advice that he’s putting out there, the sound, logic, truth really, that he’s putting out there, that everyone needs to understand.
So he defines an asset as something that puts money into your pocket and liability as something that takes money out of your pocket. So it’s all about cash flow.
Now, most people think that if they buy, you know, even like, let’s say, let’s say, a fancy car that appreciates or an old-style car that they will probably enjoy for resale in the future.
Well, that isn’t an asset by his definition because it doesn’t put money in your pocket. It probably takes money out of your pocket because you have to maintain it, store it, and do all these things that take dollars out of your pocket.
And I think this matters because people need to understand until you’re wealthy. You don’t have to worry about being nickel and dimed to death; for the rest of us, if we’re going to buy a house, a piece of land, or do anything like that, we need to factor in the taxes, we need to factor in all of the things that are going to cost to upkeep that asset.
Even with real estate, for example. A piece of land that doesn’t have an income on it. It’s a liability if it takes money out of your pocket.
Suppose you ask a particular economist or financial person this or that or whatever. In that case, you will get different definitions of whether that is true or an asset, liability, or whatever.
Taking money out of your pocket is a liability. Because it’s just, it’s putting a strain on you and reducing the likelihood that you can maintain what you’re doing because you have to keep feeding these hungry things, right?
Let’s say you buy a piece of land and then lease it out to a company building an apartment complex. Then they pay you for 20 or 30 years, and you pay off your debt service, which is your mortgage or whatever you owe the bank for, and then the rest goes into your pocket as income, which would be an asset.
But if it’s just a raw piece of land, you must pay the government every year to own the freakin’ thing; that would be a liability. And this is very, very important to understand.
Most people don’t understand this because the American dream has been sold as a three-bedroom house with a white picket fence.
Your greatest asset, your home is your biggest asset; you have equity in your purchase, in your house—complete and utter nonsense.
I have not bought, I’ve been renting my whole life, and I don’t even know if I’ll ever buy for my primary residence. I much prefer to purchase investment properties, get a renter, and make sure that the rent I’m charging can cover my debt service, insurance, taxes, upkeep, and all that, and then whatever’s left over is my profit.
Then I have an income-producing asset. Well, when you have a home, you live in your home, you pay for all the stuff you have to pay for, debt service, or just rent or whatever, upkeep, a/c, cutting the lawn, paying the thing, washing it, maintaining it, when stuff breaks, whatever, insurance, property taxes.
All of that is a massive drain out of your pocket. And that’s why most people think that the most significant asset, their home, is their most significant liability. Isn’t that just funny how common knowledge can be so backward?
Again, I wanted to keep this short video, guys.
When you’re evaluating anything, if you’re buying income-producing stock, for example, or even just a store that doesn’t take money out of your pocket, suitable?
It doesn’t; a stock would be an asset because it doesn’t take money out of your pocket. It doesn’t necessarily put money in your pocket unless it’s a dividend-paying stock, which I highly recommend having some dividend-paying store.
I invest in dividend-paying stocks myself. Suppose you buy anything with your money if you’re going to buy an asset, even cryptocurrency, for example. That’s a whole other talk for another day.
But cryptocurrency is not an asset. It is a way to store value, like gold; I mean, I guess gold pretty much be an asset; it’s a hedge.
It’s not an asset in the Rich Dad sense because it doesn’t produce income, but it’s an excellent stored value; it’s just not likely that gold will be worth anything anytime soon.
Whereas if you hold dollars, there’s a chance that the dollar could crash, and all your wealth goes poof.
So I don’t, again, don’t wanna go down those rabbit holes; the thing you should focus on doing is buying items that either can use compound interest which is growth stocks that you can hold for a long time, ideally forever, as Warren Buffet would say, his favorite holding period is forever.
Dividend-paying stocks, which you would then reinvest the dividends back into your investments, and you get the benefit of compound interest, plus you get the benefit of having some income coming in.
In real estate, you lease or rent to someone, or someone uses it for something so that you then get income from it. And anything that produces you money.
You want to try to own a business, buy a website that spits out a couple of hundred bucks a month and provides you passive income, or put money in your pocket.
If you don’t have a lot of money, this might seem like a wasted bit of advice, a destroyed video because, you know, you just can’t be buying these income-producing things right now, which makes sense.
But if you at least understand the difference, you won’t be taking on the liability investments that people think are assets when they’re not.
And that’s for most people, their home. And so, for most people, I don’t think you should buy a home. You shouldn’t, and if you look at the numbers, there’s this good calculator in the New York Times; if I can find it, I’ll link it below, but it’s the costs of renting versus the cost of owning a home.
Once you calculate the numbers, running a home costs more than renting. And that accounts for your equity, property, and all these things, which is crazy.
And I’m sure there are instances where if you’re in a hot market, and you buy, and you sell, you get your money back, but that is very speculative, and it is still pulling more money out of your pocket.
So it’s riskier. And that’s the big thing, I would say.
If you want to buy a home to try to make more money through appreciation, you’re going to be having more money coming out of your pocket as a result because renting versus home owning, you’ve saved way more money renting.
Homeownership is just more expensive; it just is. It always will be. It’s a more significant risk. There’s more money you’re going to put into that house, and for who knows how long, the future is uncertain.
Whereas renting, you could stop paying your lease in a year or two years or whatever it is, and you have no other risk beyond your rent payment.
You don’t have to fix the a/c if it breaks, something happens, and you’re not, whatever, you’re good. You don’t have to worry about any of that stuff. And then you also got the peace of mind which is a whole other thing.
In today’s video, the focus is asset versus a liability. Avoid purchases or anything that takes money out of your pocket.
Cars are not assets; boats are not assets, and an old car that would appreciate is not an asset.
Even things like maybe even like investing in art which has historically been a good investment, like scarce art, is a good investment over the long term, but if you have to pay to store it, or you have to pay to move it or transport it, do these things like that like it’s still a liability.
It takes money out of your pocket, and whether you recoup your investment later on, is a big if. That would be a liability.
So I hope this video is helpful; if you have any questions or comments, leave them below; I’m not claiming to be a financial genius or wiz.
I’m not proclaiming to give you financial advice; I’m giving you life advice, I would say. And follow it if you want, ignore it if you want, whatever way works for you, that’s fine.
But this is my definition; these things have worked for me and are some things that I learn the hard way and have seen others make big mistakes.
So maybe it’ll help you when you’re deciding whether you want to buy a house, or perhaps it’s not the right time to buy a home, and if you’re already going to take on liability, don’t buy a prominent place, because it’ll just go up, your taxes will go up. Et cetera, et cetera, et cetera.
In general, avoid assets that take money out of your pocket. Invest in things that put money in your pocket.
Thanks for watching.
Founder/CEO, Wild Foods