How Wealthy People Think About Money

Real estate investing is a tough way to make an easy living. You can get rich and generate passive income for a lifetime, but only after you work very hard and for a very long time to build the assets that will generate a return on that hard investment. You must acquire knowledge and skills. Wealthy people create and acquire assets. An asset is something that puts money into your pocket. A liability is something that takes money out of your pocket. Wealthy people sell more than they buy. They build a portfolio of assets and liabilities, and the assets generate more money than the liabilities consume. They use the assets to pay down the liabilities, while generating a net positive cash flow into their bank account. They only acquire a liability by first acquiring an asset to pay for that liability.

Compare that wealth creation model to what you are doing now with your money. Are you buying liabilities or toys that go down in value, without first acquiring an asset that pays for those liabilities? First accumulate assets that generate net positive cash flow, then you can choose how to use that cash flow to buy toys or to pay for your personal expenses. At the start, it will be a grind to learn how to acquire assets. Many things in our society seem like assets, but are really liabilities that are never worth more than we pay for them and usually drop dramatically in value over a short time.

Suppose you want to buy a fancy new car with a price tag of $30,000. Many unwealthy people use a “lay away” plan to buy a car by paying a monthly payment into a separate savings account. When they have enough money, they withdraw the money and pay all cash to buy the car. Then they continue making monthly payments into the savings account to buy their next car in a few years. They save a large amount of money by not paying interest on a car loan. Instead of a savings account, some people pay into a good growth mutual fund to earn a higher yield.

Poor people won’t even save their money to pay cash for a car. They will just borrow the money to buy the car, make monthly payments for years, then have to borrow again when they want to trade-up to a new car. They will literally make car payments forever.

An asset is something that puts money into your pocket. A liability is something that takes money out of your pocket. A car is a liability, because it takes money out of your pocket. Wealthy people avoid buying liabilities without offsetting assets. When they want to buy a liability, they first buy an asset to pay for that liability.

A wealthy person would instead determine the monthly cost of ownership for the car, including debt payments, fuel, taxes, insurance, and maintenance. Then that wealthy person would buy an asset that generates more net monthly income than the total cost of car ownership. The asset is purchased with a loan and an equity investment. (A wealthy person would not pledge the car as collateral for the loan.) The car is a liability that is covered entirely by the asset. The wealthy person has added a liability and an asset to his balance sheet and financial statement, showing a net positive cash flow into his bank account after buying the car and paying all of the expenses of the car.

Invest in your own self-education, because our public education system is designed to produce workers who prefer job security over financial freedom. They are financially illiterate. You need to learn how the wealthy think about money, assets, and liabilities. Every asset acquisition increases their net worth and their net positive cash flow. Poor people do not create jobs, rather they trade their time and effort for money, which creates wealth for other people. If you do not want to be poor, then refrain from what poor people do. Do what wealthy people do and learn how to acquire assets in excess of liabilities.