When I was in college, I read ‘Rich Dad Poor Dad’. Of which, it simply defines an asset to be something that puts money into my pocket and a liability is one that takes money out of my pocket. Personally, I find this definition to be simple and it becomes my bedrock that laid the foundation to my financial life.
Soon, I studied professional accounting. From it, I learnt that an asset is an item that I either own or control. Thus, the question is, ‘Which of the two definitions do I use practically in managing my personal finances?’.
Today, I use both definitions, but with a little twist and modification on my part. What I do is to separate the assets that I own based on my motive of ownership (MOO). I believe this could tell me if I’m managing my finances like the rich or if I’m a middle income person. Hence, I have identified 4 different types of assets:
Asset Type #1: Consumption Assets (CA)
They are assets that I own, which are meant for my own personal consumption. These assets do not produce income. For example, if I buy myself a nice car, the car is categorized as a consumption asset as it is intended for my own use and it does not contribute income on a regular basis. Whereas, if I buy a home to stay, that property is classified as a consumption asset.
So once again, the classification is based on my MOO, not the type of object.
Asset Type #2: Speculative Assets (SA)
They are assets that are bought in anticipation or expectation that they can rise in prices in the future. For instance, if I bought a stock for short-term gains, that stock would be classified as a speculative asset. Likewise, if a property is bought with an intention to be flipped for quick capital gains, it is a speculative asset.
Asset Type #3: Income-Productive Assets (IPA)
They are assets that produce regular income, They include stocks that pay out a consistent stream of dividend income, tenanted properties that generate rental income, intellectual properties that could earn royalties, FDs that earn interests and so on and so forth. The income derived from them should be passive as the income is based not on our active labor but our ownership of these assets.
Asset Type #4: Ourselves
We could be our most important asset, although we are not ‘objects’ which can be included into our balance sheet.
How Does the Rich Think Differently from the Middle Class?
This is easily revealed by looking at the type of assets in their balance sheets.
While both the rich and middle class may have all four types of assets, the main difference, however, lies in their priority of these assets. The rich will be excited to accumulate certain types of assets, which may vary from the middle class. So here, let me reveal their differences in terms of their balance sheets.
First, the asset column of the middle class would contain the following:
Their priority is ranked as follows:
1. Consumption Assets
2. Speculative Assets
3. Income-Producing Assets
For instance, when they make more money, they would start by upgrading their homes and cars first. After that, they might want to try their hands in trading or flipping stocks, properties, cryptos, ETFs, unit trusts, or just about anything that could be traded in the markets. Otherwise, they may put their excess funds into FDs, pension funds or other fixed-income funds. Then finally, they may consider joining personal development courses with their spare cash or money.
Next, when it comes to the rich, their asset column would be as follows:
Their priority is ranked as follows:
2. Income-Producing Assets
3. Speculative Assets
4. Consumption Assets
For instance, the rich will begin by building their own capabilities in making and keeping wealth. Subsequently, once they earn more money, they will invest in a portfolio of assets that could produce passive income regularly. Once again, I’m not saying that the rich do not trade stocks, flip properties, speculate cryptos or have nice homes and cars. Instead, what I’m saying is that the difference maker, between the rich and the middle class, is the existence of real assets, which can bring in passive income consistently.
Are Your Assets Making Your Life Richer?
For the middle class, life looks great on the outside as they expand and upgrade primarily their consumption assets as their income grows. But, these assets will require money (expenses) to sustain them. As such, the more money they earn, the more financially burden they will be. For them, they cannot stop working as if they do, their income stops and thus, causing them to lose their ‘assets’.
That is called a rat race.
For the rich, some may look like a million bucks and some don’t. Looking rich to them is not as important as being truly financially rich. Instead of compounding debt and expenses, the rich prefer to compound their passive income or wealth in the long-term. The more passive income they make, the more liberating they would feel. Some may come to a point in life when they choose to stop working for survival but working out of pure passion to fulfill their life purposes.
That is called a purpose-driven life.
So What if I’m in the Middle Class?
Is it possible for me to be rich and wealthy?
The answer is yes. It is quite possible. But, the first thing to do is to appreciate a key fact that what you think about money is totally different from what the rich think. You need to forgo your ideas about wealth and start picking up ideas and principles adopted by the rich when it comes to finance and investing.
Having a rich mindset is a more permanent solution to improving your finances, not necessarily just having more money.
Here, if you wish to learn more about how the rich manages money, join a free 1-Hour Training Session as follows: