The Single Biggest Difference Between The Rich and The Poor

In the world of personal finance, the terms “assets” and “liabilities” get thrown around often.

Assets and liabilities are a fundamental part of life.

They make up a significant part of who you are, and the kind of life you live.

Some might even say that these terms are the reasons why the rich get richer, and the poor get poorer.

What is An Asset?

The common definition for an asset is something that puts money into your pocket.

Investing into various asset classes like:

• Stocks

• ETFs

• Real Estate

Has helped individuals build wealth for generations.

But, its something that was never taught to those who could benefit the most. (You)

Award winning author Robert G. Allen once said…

“How many millionaires have become wealthy by investing in savings accounts? I rest my case.”

Guess what? He’s right.

There are typically two types of assets.

1. Value appreciating assets — something that appreciates, or goes up in value.

2. Income producing assets — something that produces an income for the owner of the asset.

Some assets can do both, but it’s up to you what you prefer.

The general rule of thumb is to start with value appreciating assets when you’re younger, to grow your wealth, and then focus on income as you get older.

Examples of value appreciating assets:

• Growth stocks (Tesla, NVIDIA etc.)

• Growth ETFs

• Cryptocurrency

Examples of income producing assets:

• Dividend stocks (IBM, Coca Cola etc.)

• Dividend ETFs

• Real Estate

There are several that can fit into both categories. But, do you know what asset has the best overall ROI?

You.

What is A Liability?

The common definition for a liability is something that takes money out of your pocket.

I’m sure you would’ve guessed that after reading the definition of an asset.

Liabilities come in all different shapes and sizes, and in a lot of cases, it can be hard to categorise something as a certain liability.

More often than not, it’s down to the owner, and how something is used, rather than what it is.

Despite this, here are some examples of liabilities that are common in society:

• Designer clothes — typically overpriced and worn by people who aren’t affluent, with the aim of looking more wealthy.

• Financed cars — paying each month for a car you don’t own is a liability. Whatever happened to just buying a car, and then it was yours?

• Credit cards and personal loans — can be beneficial, but are financially damaging to the majority of people who use them.

When you’re on a journey to build wealth and achieve financial success, it’s important to maximise your exposure to assets, and minimise your exposure to liabilities.

Everything Is An Asset or A Liability

The more you think about assets and liabilities, the more you realise that almost everything in our lives can come under one or the other.

• People

• Objects

• Devices

• Hobbies

Anything.

But you might be thinking, how can a hobby put money into my pocket?

When it comes to something that isn’t financial, think of assets or liabilities like this:

• Asset — does something bring value to your life?

• Liability — does something take value away from your life?

For example:

• A fun hobby = asset.

• A bad friend = liability.

• A massage gun = asset.

• A vape = liability.

Simple, right?

You might soon get to a point where you start seeing everything in your life as either an asset or a liability.

This can help you make subconscious changes to improve your life:

• Removing bad friends.

• Ditching things that waste your time.

• Stopping bad habits that damage your health.

It could be anything, but this is a perfect example of how knowledge can help you make subconscious improvements to your life.

Key Differences

Unfortunately, we live in a society where the prioritisation of liabilities over assets is far too common, and it’s where so many people go wrong.

The gap between the rich and the poor has never been greater, and it continues to grow.

Generally speaking…

Wealthy people buy assets to become wealthier:

• Businesses.

• Stocks.

• Real Estate.

All with the aim of getting richer.

Poor people buy liabilities to become poorer:

• Designer clothes.

• Financed cars.

• Expensive jewellery.

All with the aim of looking richer.

Notice the slight difference between the two sentences in bold?

True wealth isn’t an image that you’re trying to paint with a flashy car or designer clothes.

It’s a place that enables you to live on your terms and have full control of the type of life that you want to live.

Assets pull you closer to this place.

Liabilities push you further away.

Wealth is largely about mindset and knowledge.

Consumerism doesn’t lead to wealth. Ownership does.

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