You may have heard that the rich get richer. But do you know why?
It’s not because they’re born into money or because they have some magical power. The rich get richer because they understand the difference between assets and liabilities.
Assets vs liabilities is a simple concept that’s been around for years, but many people still don’t understand its power.
It explains why some people have more money than others even when they earn roughly the same amount each year.
The problem is most people are too focused on their liabilities – what they owe others. But if you want to become wealthy, you need to start thinking about your assets – what others owe you.
It’s not about working hard or being lucky; it’s all about having more assets than total liabilities. This blog post will explore the difference between assets and liabilities and see why having lots of assets is why the rich get richer!
What is An Asset?
Assets are something you own that increases your
Assets don’t cost you money every month, and if they do, their value goes up over time and often produces
They generate revenue for you, the owner, and can be cars, real estate, stocks, businesses, or anything with value.
For example, if you own a paid-off house worth $200,000 that’s an asset. The rent from the tenants living in the house would be your
What Are Some Other Examples of Assets?
You may have assets you don’t even know about right now!
Examples of Assets Include:
- Rental Properties
- Paid Off Vehicles
- Mutual Funds and Stock in a Company
- Precious Metals Like Gold and Silver
- Intellectual Property, Such as a Patent or Copyright
- Cryptocurrencies like
- Cash in The Bank
- Small Businesses and Business Assets
- Valuable Artwork
Ownership of assets is why the rich get richer.
If you don’t own them, or if the
Tangible Assets vs Intangible Assets
There are two types of assets: tangible and intangible.
Tangible assets are physical objects that you can touch. Intangible assets are things that you can’t touch, like an idea or a trademark.
Most people focus on their tangible assets because they’re easier to understand. But the truth is intangible assets are more valuable than tangible assets.
An idea has the potential to make you rich, whereas a car is just something that depreciates over time (goes down in value).
What Is a Liability?
Liabilities are things you owe someone else or an amount owed to purchase or maintain an item.
It can be money, a car loan, mortgage, student loan or any other type of long term debt. A liability generates cash for someone else or a lender because they charge interest on the amount owed.
For example, if you have a car loan with a balance of $20,000 and an interest rate of 3%, then that would be a liability.
The lender will collect their monthly interest payment (dividend) as the loan balance goes down.
What Are Some Other Examples of Liabilities?
Just like assets, liabilities come in all shapes and sizes!
Long Term Liabilities Include:
- Car Loans
- A Bank Loan
- Student Loans
- Credit Card Debt
- Business Loans
- Personal Loans
Not having many long-term liabilities is why the rich get richer.
The rich use liabilities to their advantage by borrowing money at a lower interest rate and investing in assets that generate a higher return.
They also use their
There are two types of liabilities;
Fixed vs Variable Liabilities
Fixed Liabilities – These are fixed payments that don’t change each month.
An example would be a car loan with a set monthly payment.
Variable Liabilities – These are liabilities where the payments can change each month.
An example would be credit card debt, which has different interest rates and fees each month.
How Do I Know if Something is a Liability vs Asset?
The easiest way to determine if something is an asset or liability is to ask yourself two questions:
- Does this generate
If yes, then it’s an asset.
- Does this cost me money each month?
If yes, then it’s a liability.
It is more complicated than this, but those are the two main questions you should ask yourself!
For example, if the answer to both of these questions is yes, then it’s still an asset. But, if the answer to either question is no, it’s a liability.
What’re The Main Differences Between Assets vs Liabilities?
[snippet]The main difference between assets and liabilities is that assets generate
Another key difference is that you own assets, while liabilities are things you owe.
Lastly, the value of assets goes up over time while the economic value of long term liabilities goes down.
Assets are things you own, while liabilities are things you owe.
The rich get richer regarding assets and liabilities because they know the importance of owning assets and having more.
If you have more long term liabilities than assets, you are likely not going to get rich any time soon.
What Is The Relationship Between Assets and Liabilities?
The relationship between assets and liabilities is assets are used to pay off liabilities.
Liabilities cannot pay off assets because assets generate
For example, if your assets generate cash flow of $100 each month and your financial obligations cost you $80, then there’s a positive cash flow of $20.
You can use the extra cash flow to pay off a liability like credit card debt or invest in additional assets that generate revenue for you!
Is My House an Asset or a Liability?
Your house is both an asset and a liability.
The assets portion of your home is equity, while the liabilities portion is the debt that costs you money each month.
A rental property with a mortgage is considered an asset because it generates
There is no liability because you own the house outright.
Knowing this and having assets is…
Why The Rich Are Getting Richer
The rich are getting richer because of how they spend their money.
It’s not because of how they save it. Nope, they’re becoming wealthier because they purchase many assets vs liabilities throughout their lives.
The spending of their money on assets leads to the ownership of additional assets.
Quick Note: When I say rich, I’m talking about the millionaire next door. Someone who’s likely your neighbour or someone you’d see while out grocery shopping. Not the super-rich like celebrities, athletes, or musicians. But your regular everyday millionaire who lives next door.
The rich buy things that will make them money and use them to buy even more assets to make them more money. It’s one giant rolling snowball of wealth creation.
Saving Money Won’t Make You Rich
You have to save and invest. Saving and
The problem and why most people aren’t rich is because they don’t have a high enough
So, there’s nothing left to invest and purchase assets with.
Plus, if you have too many financial obligations, it’s hard to save because your money is going towards paying for them.
Knowing this is why the rich get richer!
They have or create a high-income stream for themself. Then, they purchase assets that generate more
This allows them to build their net worth over time, which eventually leads to them becoming millionaires!
Why Most of Us Are Broke
Most people are broke because they spend their
We graduate high school or college and start spending the money we make by renting or buying our own place or a new car.
Most of the money we make right out of college and high school is gone right away to monthly long term debt payments.
And then we spend and spend and spend and… spend some more on other things that aren’t assets like:
- Car & House Maintenance
- Eating Out
And a whole lot more I won’t mention. But, this spending is why most of us are broke. We get stuck and from an early age in a vicious cycle of buying things we don’t need or racking up debt.
Yes, wealthy people do buy liabilities.
But they use more or most of their money to purchase
If You Want to Be Rich Shift Your Money
So, if you want to be rich and break the cycle of being broke, start purchasing assets with your
Rich people spend money just like you. But they’re collecting rent or
It’s okay to buy liabilities, but make sure your long-term assets generate more
And remember, it should always be assets before liabilities.
Wealthy people use unexpected money to buy assets and business assets, not liabilities. Those who aren’t as rich spend their cash on liabilities like cars, food, and entertainment.
There’s nothing wrong with this by the way, as long as you know and understand this.
When You Get Money, Purchase Freedom
Using money to buy freedom and time freedom is why the rich get richer.
They “keep” the money they spend on things forever because what they’re buying is an asset. The asset then goes out and works for them every day for the rest of their lives.
The money they spend always leads to more money.
- Properties they own create rental
income, which leads to more properties
- Stocks they purchased years ago allow them to buy more stocks
- Income from a business they started produces more
- The intellectual property they created leads to royalties
Assets will enable them to purchase additional assets. This all snowballs and compounds over time. More liabilities won’t do this for you.
You have to purchase assets to make money and be rich. Assets are the only thing that will make you more money after the initial cash is made.
They’re what allow us to create multiple streams of passive
But it all starts with two things:
- Spending less than you earn, and…
- Investing the difference
Doing this will make you rich over time. It won’t happen to you all at once overnight, but becoming a millionaire will eventually happen if you keep doing these two things.
Owning Assets Will Make You a Millionaire
Spending less than you earn and
These concepts may be challenging to put into practice at first, but they can lead to financial security and time freedom so long as you put in the time and effort.
You can even retire in your 30s, 40s, 50s or whatever age is right for you knowing this information.
But it all starts with understanding what makes something an asset versus a long term liability and taking action!
Taking action is what will change your life, financial health, and the financial outcome of your family.