In the game of accumulating money, we keep score with a balance sheet. This is such a basic and important rule that’s missed by too many people, so let’s start with the fundamentals. Think of a balance sheet as just a sheet of paper with a line vertically down the middle. On the left side of the balance sheet is a list of assets. On the right side of the sheet is a list of liabilities. Also on the right side is equity, or what you actually own.
The math formula for this is: Assets = Liabilities + Equity.
Do you know the difference between an asset and a liability? You have to know the difference to win the game of accumulating money. Let’s start with the home you live in. Is that an asset or a liability? If you answered asset (as most people do on their balance sheet), you are wrong. Why? Because your home, even if it’s free and clear, consumes money and doesn’t put money in your pocket. You have to have a place to live, and that will always consume some money. So it is a liability in the truest sense.
An asset as anything that puts money in your pocket. A liability is anything that takes money out of your pocket. The big mistake that poor and middle class people make, is spending their lives buying liabilities instead of assets. If you want to be rich you simply need to spend your life buying assets.
I think of assets as crops on a farm. My favorite assets are like fruit trees that continue producing harvests year after year. I don’t have to tell you, but real estate income properties make some of the best fruit tree assets I know of. Other choices available are stocks, bonds, certificates of deposits at banks, insurance annuities, and even your own business.