One of my favorite books on personal finance is Rich Dad, Poor Dad by Robert Kiyosaki. A real estate developer and best-selling author, Robert explains the difference between assets and liabilities in his book.

Let’s explore two different types of assets.

The first definition of asset is something you own that increases in value over time. One example of appreciation is buying bonds, which is essentially lending out money to the government or a corporation for a set amount of time. Another example is from dividends, such as buying a dividend-paying stock.

The second type of asset is something you own that more than pays for itself over the long run. One example is passive income from recurring sales, such as royalties from publishing a book or ad revenue from blogging. An example is buying a house and then renting it out at a cost higher than your mortgage costs.

The common trait between the two types of assets is that the return on investment, or ROI, is positive. In other words, you get more than what you paid for, even after adjusting for inflation and all costs involved with owning the asset, such as rental property maintenance and website domain costs.

Liabilities are the opposite of assets: something you own that goes down in value over time.

One example of a liability is a fancy, new BMW that loses a few thousand dollars each time you drive it. Another example of a liability is a house that goes down in value over time. A third type of liability is a rental property that pays back the owner less than its mortgage each month.

There are several important points to note about liabilities.

First, the BMW may be a liability in terms of pure financial value, but it may give other nonmonetary benefits to its owner, such as the experience of driving a fancy car, the confidence to believe that he or she can be rich and earn more money, or the social approval from his or her peers. Of course, such intangible benefits often cannot be measured, but still should be considered when making buying decisions. There is more to what we own than the sum total of money the items are worth.

Let’s now look at the rental property: it may be losing the owner money in the short run, because it does not cover for the monthly mortgage expenses. However, if the owner owns the rental property long enough to completely pay off the property and continues to take tenants, he or she will eventually earn more than he or she put in to pay for it. Thus, over the long run the liability becomes an asset.

Robert Kiyosaki goes into much more detail into this and other fascinating topics, and I would highly recommend the book to anyone wanting to take charge of his or her financial situation.

Visit the original post at https://www.onepercentbettereveryday.com/money/2017/6/24/blog-4-assets-vs-liabilities-ft-robert-kiyosaki

Peter Shi

Written by

Investor/Entrepreneur/Data Scientist; Blogger at www.onepercentbettereveryday.com; Connect with me on LinkedIn: https://www.linkedin.com/in/peter-shi/

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade