Assets VS Liabilities and Cashflow Pattern

Basic knowledge in the difference of Assets VS Liabilities will lead you out the Rat Race.


Assets

• Dictionary: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, bonds, real estate, businesses.
• Robert Kiyosoki: Asset is anything that puts money in your pocket.
• Rich People: Investments like stocks, property estate, mutual funds, business.
• Poor People: Car, cellphone (iPhone, Blackberry), a house, a gadget (iPod, iPad, PSP).

Diagram 1:1 Graphically shows Asset's definition.

Liabilities:

• Dictionary:  An obligation of an entity arising from the past transactions or events, the settlement of which may result in the transfer or use of assets. 
• Robert Kiyosoki: Liability is anything that takes money out of your pocket.
• Rich People:  Car, cellphone (iPhone, Blackberry), a house, a gadget (iPod, iPad, PSP).
• Poor People: Investments like stocks, property estate, mutual funds, business.
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               Diagram 1:2 Graphically shows liability's definition.

Cash flow Pattern of the Rich, the Poor and the Middle Class ( Excerpt from Robert Kiyosoki's work)

Diagram 1: 3 Cashflow of Rich People

The cashflow pattern of the rich shows that their income is invested in an assets-producing income like stocks, bonds, business, real estate which in turn provide them with extra money going in their income column which is then again re-invested in the asset column. Notice that, the rich people doesn't use their earned income to spend on the liabilities which will served to be an expense taking away their money out of the system. They get the money, invest it then earned passive income and reinvest it again. The cycle continue and the rich people become richer and richer and richer again. A cycle never stops because they are financially literate.

Diagram 1:4 Cashflow of Poor People

The cashflow pattern of the poor shows that whenever they get their salary (from jobs), they use it immediately to pay off their expenses (debts, basic commodities like foods, bills etc). Notice that the poor doesn't give attention to their asset column thus no passive and extra money enter their income column. They work, receive their salary, pay their bills (expense) and work again. This is called The RAT RACE.

Diagram 1:5 Cashflow of the Middle Class

The cashflow pattern of the middle class (most of the pinoys can relate to this) shows that upon receiving their salary, they pay their expenses  (like bills, mortgage, debts) and the extra money will be invested it what they believe to be an asset (like cellphones, gadgets, cars, new house) turned out to be a liability later on, ending to be an expense, thus taking their money out in the system.   

Diagram 1:6 Cashflow of the Financially Free or Wealthy People

The cashflow pattern of the wealthy people or the financially independent, financially free individuals shows that their assets-producing income pays for their expense and their assets pays also for their liabilities. It means that their hard work in investing and re-investing in income-producing assets had mature enough that it can already pay for whatever liabilities they want (like travelling the world, buying their dream house, buying their porsche etc).

Like what I said in my earlier blog entitled "Be Financially Literate", we all have a choice. We can chose to remain poor and middle class and be in the rat race all our life leaving not legacy and riches but debts-to-pay in the generations to come, with regrets of not having able to lived our dream life; Or we can chose to be rich and wealthy, delaying instant gratifications in order to save and invests for our retirement and be able to live the life we want to lived. 

The choice is YOURS. 

Make your dreams and the dreams of others happen by choosing the right one.

God Bless us all! Good night :)

-Joane Nicole Hamili