New to investing? Rewire your mind

February 11, 2019

In today’s article, we talk about simple steps you can take to achieving financial freedom. 

Let’s start with what a liability and an asset is. 

Boring economic terms? 

Perhaps, but it’s a very important concept to understand as this knowledge is what separates the rich from the poor. The rich have an innate understanding of what liabilities and assets are.

So, let’s get straight into it, a not so boring explanation that is easy to understand:

A liability is something that takes money out of your pocket.

An asset is something that puts money into your pocket. 

Told you it was simple!

A House is a Asset Liability

Many people say having a home is an asset, but in truth, it’s a liability. I know that many of you might disagree with this viewpoint but let’s look at it with a simplified lens.

I ask “Is the house you live in putting money in your pocket or taking it out?”. 

With my house, the money is going out of my pocket as I am paying a mortgage. 

Many people live paycheck to paycheck and that’s because they buy a lot of stuff.

Today, I see many people buying a house because they consider it to be an asset. 

A house may grow in it’s ‘worth’ but I only consider a house to be an asset when you rent it out and have a surplus after making your mortgage repayments on it. 

For example, my mortgage is $1,430 per month. 

The monthly rental yield I can get from my property is $1,600 per month. 

If I were to rent my house out, I would make a net profit of $170, however, I am not. 

Therefore, I consider my house to be a liability. Glad you agree 🙂

What’s an Asset then?

So by our definition above, then, what is an asset? 

I consider dividend-paying stocks, businesses, rental properties and education to be an asset. Non dividend-paying stocks become an asset when they grow in value and you sell them for a profit.

Especially with education, if you were to learn something and apply it – it is an asset. 

I read an interesting opinion piece that stated Warren Buffet used to buy pin bowl machines which he put in barbershops, movies and other outdoor areas. This generated income for him without him having to be physically there. Over the years he invested the money he earned in more different machines, which he installed in many different locations, and this earnt him more money and this is how he got started.

The biggest reason people fear to invest money in assets is that assets could lose money. 

However, I find it surprising how no one ever stops and thinks about how: after purchasing a brand-new car from a dealership, your car’s is worth 20% less the minute you drive it away. 

Whereas with an asset like education, when you learn something that makes you money, you take that learning and repeat it to make more money. When you lose money from something you learn and apply, it’s still an asset because you hopefully won’t repeat that mistake.

Assets pay for Liabilities

Here’s another concept that underpins financial freedom:

Building an asset is the best way to pay for liabilities

Talking to many successful business people, I find that they always focus on building assets to make more money – in order to invest in additional income generating streams.

I also found out that when they do purchase liabilities, they have a minimum of two or three assets to pay it off.

I hear people asking each other “How much money do you make?”. This is the wrong question to start the premises of judging someone’s financial success. 

It’s not how much you make, its how much you keep

What you should ask is “How much money do you keep?”

Let me use a scenario to help you (and you can come to your own conclusion at the end of it). 

In the outer suburbs of Melbourne, live two young men, Alex and Ahmed. 

Alex makes 1 million AUD a year and Ahmed only makes 35,000 AUD a year. 

Alex spends 990,000 AUD a year. Ahmed spends only 15,000 AUD. 

After 12 months, Alex has a bank balance of 10,000 AUD. Ahmed has 20,000 AUD in the bank. 

Who is better off? Hopefully, your answer is Ahmed 🙂

I want you to rewire your mindset and realise how much money you keep is more important than how much you make

This is because the money you make leaves your pocket at the end of the day. 

If you are not in control of the funds you keep, you will never grow wealth and be in control of your financial freedom.

In the scenario above, Alex seems to be doing very well however he is living paycheck to paycheck. From the outside it may look dandy – he might have assets liabilities like boats and cars! 🙂

That means Alex over the years must keep working in order to maintain his repayments. 

The point I’m trying to drive home is that what you keep from your income is what matters. If you can increase what you keep, you can use it to work towards building an asset that over time will pay for your liabilities and you don’t have to rely on a job. Assets are the true way you can get ahead and on your way to financial freedom.

A common mistake

A mistake I made when I first started investing was that I was asking the wrong people for advice. 

A carpenter would know a lot about carving and sculpting wooden furniture. 

However, if you were to ask him what’s the best marble to sculpt a sculpture – you are asking the wrong person for advice. 

Similarly, if you’re looking to invest, you should ask the right people how to do that. They would be able to correct you if you are asking the wrong questions. 

As human beings we tend to gravitate towards the people we are comfortable with and therefore end up asking the ‘wrong’ people for advice. We ask our friends and family for opinions on matters that they are probably not subject matter experts in.

You are the average of your closest friends. For that reason, if you want to become better in life and push yourself forward, you must surround yourself with people who are successful or have the same mindset as you and are striving to make their vision a reality.

3 Rules to start

Another thing you may have realised is that assets almost always appreciate over time and liabilities depreciate over time.

You want to start searching for assets that appreciate over time and have a clear understanding of what liabilities are. 

The rich get richer by investing their money in assets, which generate the funds for them to invest in more assets.

Let me give you 3 rules you can use right now to start your investment journey and life in general:

  • Rule 1: Think Assets
  • Rule 2: Invest in Assets
  • Rule 3: Repeat

This is so important because most of the people we surround ourselves with, are always talking about liabilities. 

Think about it – most people are always talking about the newest car, the newest iPhone, or the latest trend etc. 

If they are always interested in talking about liabilities, you will also be naturally interested in buying liabilities.

Now if you were to surround yourself with people who care about financial freedom, are chasing their dreams, and who pay a lot of attention to their investment (in order to build businesses), are looking for opportunities that operate themselves – you surround yourself with the right friends who are either doing it themselves or facing the same struggles as you would be.

These friends will push you forward through hard times, however, when you have friends that care about liabilities and talk about liabilities every day, you will not be able to move forward with them when you talk about applying the hard yards.

People say a rolling stone does not gather moss. In my mind – a stationary stone generates no momentum and I have no interest in gathering moss. To move forward in life, you must generate momentum. If a shark was to stay still it will die. It must keep moving forward and as a human being, you have to keep moving forward.

You must surround yourself with friends who want better in life and want the same life goals as you. It is because they are willing to go through the struggles to achieve a goal and they are willing to make sacrifices to get there.

So from this point onwards, I want you to always to think anything in life in terms of assets and liability and apply the three simple rules to build wealth. 

Is money coming into your pocket or is the money going out of your pocket?

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