Assets Vs. Liabilities – Why the rich get richer and the poor get poorer

We’ve all heard that saying “the rich get richer and the poor get poorer” and I have to say that this fact is actually very true. There is however a very good reason for this and it has nothing to do with rich people being bad and taking money away from poor people as the saying sometimes implies. It has mostly to do with financial education and spending habits.

First let’s define assets and liabilities. My mentor, a deca-millionaire, would say that ‘assets’ are anything that puts more money into your pocket than it takes out. A liability is anything that takes more money out of your pocket than it puts in. This means, that if you own a home and have a mortgage with interest, it is not an asset. That also goes for your cars, and other high priced items. Liabilities on the other hand, are purchases that you pay for in order to get them, keep them, use them, or repair them. If you receive income from them by renting them to others and it does not exceed the expenses to maintain them, it is still a liability.

Let’s say you bought a Mercedes-Benz SLS AMG and it cost you around $200,000. It would never become an asset because it would continually take money out of your pocket even after you purchased it. Once you got around to selling it 5-10 years later you would get less than your purchase price and thus prove that it was a liability. Now on the other hand let’s say you creatively financed and bought some investment real-estate with your $200,000 that netted you a cashflow of $5000/month. That $5000 dollars in rental income could go towards financing that Mercedes and even when it was time to sell the Mercedes you would still have that cashflow.

What do the poor & middle class do?

The poor and middle class usually stay ‘poor’ and ‘middle class’ because of their mindset and financial education. Once they get more money than they need for expenses, they usually spend it on liabilities. The energy, time and labour from working for their money now effectively goes “out the window and down the toilet,” as my mentor used to say. That money is never seen again. Here are some examples of purchases that the poor and middle class make with excess funds:

• Food
• Entertainment and entertaining others (parties etc.)
• Costly electronics
• Trips
• Household gadgets
• Clothes & jewellery
• ·Vehicles

What do the rich do?

The rich purchase assets that create positive cashflow, portfolio and passive income. Some examples are:

• Stocks, bonds, mutual funds, etc
• Investment real-estate
• Businesses

Cash-flow is the amount of money that they have coming in on a regular basis from their income producing assets. It is how they retire rich and get richer and richer. 

So how do they drive those expensive cars like the Mercedes-Benz SLS AMG? They use their money to purchase assets and then use their portfolio or passive income from the assets to purchase the same liabilities that the poor and middle class do. The difference in their spending is that their money doesn’t go out the window and down the toilet, never to be seen again. The money that the rich worked for, goes to creating more money. In this way, their money begins working for them and they can retire rich. The best part is that even after they retire, their money begins to compound and they get richer and richer! 

believing in your Higher Life,