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Another habit that rich people have over "poor" people is that they invest in assets and not liabilities, and their ability to categorise investments into these

Another habit that rich people have over "poor" people is that they invest in assets and not liabilities, and their ability to categorise investments into these two buckets. An asset as in something that contributes to your net value vs a liability that deducts from your net value. I've been using YNAB to solve my personal finance problems and it's been the best solution to my problem. Doing zero-based budgeting (you only budget money you have) is a superior approach to the traditional budgeting where you set it once. The only three things I need in YNAB to make sure my personal finance in check is: - Giving every dollar a job - Making sure my net value increases each month - Making sure the money I spend is as "old" as possible Tracking my assets and seeing what part of my mortgage goes out the window (the interest) and how some of my funds move from my bank account to my apartment each month changed how I understand the flow of money. I know this might sound like a commercial, but I've come from a situation of having a hard time handling my money to being fairly financially literate in my personal life. Edit: formatting

thanatropism 9y ago
Wrong. A liability is a source, an asset is a sink. You take debt to buy a house: the debt is a liability, the house is an asset. What's neither an asset nor a liability is your (net) income (i.e. wages, returns on capital, etc. minus spending). So: assets = liabilities + net income. From this equation you could erroneously deduce that net income = assets - liabilities but I hope I don't have to explain why this is a stupid conclusion.
- beambot 9y ago
  > From this equation you could erroneously deduce that... Please elaborate. My basic arithmetic is apparently erroneous.
- sokoloff 9y ago
  > assets = liabilities + net income That's a non-equation, of course. Assets and liabilities are in dollars and net income is in dollars-per-unit-time. Naturally, any conclusion arising from algebraic rearrangement of that non-equation will also be non-sensical.
  - thanatropism 9y ago
    This is a fair comment. I was looking at (delta assets), (delta liabilities). (Edit: The simplest thing is to consider a simplified accounting equation that says assets = liabilities. If I wanted to buy a house but had no personal worth, how would I afford it? Debt. The house would be the asset, the liability would be the debt.)
- loco5niner 9y ago
  Similar to the sibling comment, I would also appreciate explanation. Also, (for others who also missed it) I didn't understand the terms source and sink. this is what google gave me: "Sinking and Sourcing are terms used to define the control of direct current flow in a load. A sinking digital I/O (input/output) provides a grounded connection to the load, whereas a sourcing digital I/O provides a voltage source to the load."
  - thanatropism 9y ago
    Accounting (in the corporate sense; I kind of tripped trying to translate to a personal finance context) is based on one equilibrium principle: assets = liabilities + equity This is true by definition. So any increase in assets has to be backed either by an increase in liabilities or an increase in equity. I tried to compare this increase in equity to income (the change in "what you're worth") but muddled the issue a bit. I happen to agree with Kiyosaki's position that a house is a bad investment ceteris paribus (millions of details apply, specially the country/city you live in, but also your own life cycle, etc.). But it's not because it belongs to the liabilities bucket. It's because to acquire a house (an asset), you have to take on debt (a liability). Or pay down from your personal equity/personal worth, if you're rich dad and happen to be sitting in that much money. To simplify: if equity was not to enter the equation, the sum total of your assets would be equivalent to the sum total of your liabilities. How else would you acquire things if not from debt?
- theodorton 9y ago
  A liability is something you pay to keep, while an asset is something you get paid to keep. Simple and obvious examples are stocks that pay dividends and a loan that accumulates interest. How to identify into which bucket a house, a car or a company investment fall is the hard part, that was the point I was trying to make. Rich people understand this and leverage it. The original quote is: The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. Robert Kiyosaki, Rich Dad, Poor Dad
  - thanatropism 9y ago
    What assets and liabilities are: https://en.wikipedia.org/wiki/Accounting_equation https://en.wikipedia.org/wiki/Accounting_equation It's best to read Kiyosaki replacing assets/liabilities for "candy bars/frog legs". See if it still makes sense.

thanatropism 9y ago

Wrong. A liability is a source, an asset is a sink. You take debt to buy a house: the debt is a liability, the house is an asset. What's neither an asset nor a liability is your (net) income (i.e. wages, returns on capital, etc. minus spending). So: assets = liabilities + net income. From this equation you could erroneously deduce that net income = assets - liabilities but I hope I don't have to explain why this is a stupid conclusion.

beambot 9y ago
> From this equation you could erroneously deduce that... Please elaborate. My basic arithmetic is apparently erroneous.
sokoloff 9y ago
> assets = liabilities + net income That's a non-equation, of course. Assets and liabilities are in dollars and net income is in dollars-per-unit-time. Naturally, any conclusion arising from algebraic rearrangement of that non-equation will also be non-sensical.
- thanatropism 9y ago
  This is a fair comment. I was looking at (delta assets), (delta liabilities). (Edit: The simplest thing is to consider a simplified accounting equation that says assets = liabilities. If I wanted to buy a house but had no personal worth, how would I afford it? Debt. The house would be the asset, the liability would be the debt.)
loco5niner 9y ago
Similar to the sibling comment, I would also appreciate explanation. Also, (for others who also missed it) I didn't understand the terms source and sink. this is what google gave me: "Sinking and Sourcing are terms used to define the control of direct current flow in a load. A sinking digital I/O (input/output) provides a grounded connection to the load, whereas a sourcing digital I/O provides a voltage source to the load."
- thanatropism 9y ago
  Accounting (in the corporate sense; I kind of tripped trying to translate to a personal finance context) is based on one equilibrium principle: assets = liabilities + equity This is true by definition. So any increase in assets has to be backed either by an increase in liabilities or an increase in equity. I tried to compare this increase in equity to income (the change in "what you're worth") but muddled the issue a bit. I happen to agree with Kiyosaki's position that a house is a bad investment ceteris paribus (millions of details apply, specially the country/city you live in, but also your own life cycle, etc.). But it's not because it belongs to the liabilities bucket. It's because to acquire a house (an asset), you have to take on debt (a liability). Or pay down from your personal equity/personal worth, if you're rich dad and happen to be sitting in that much money. To simplify: if equity was not to enter the equation, the sum total of your assets would be equivalent to the sum total of your liabilities. How else would you acquire things if not from debt?
theodorton 9y ago
A liability is something you pay to keep, while an asset is something you get paid to keep. Simple and obvious examples are stocks that pay dividends and a loan that accumulates interest. How to identify into which bucket a house, a car or a company investment fall is the hard part, that was the point I was trying to make. Rich people understand this and leverage it. The original quote is: The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. Robert Kiyosaki, Rich Dad, Poor Dad
- thanatropism 9y ago
  What assets and liabilities are: https://en.wikipedia.org/wiki/Accounting_equation https://en.wikipedia.org/wiki/Accounting_equation It's best to read Kiyosaki replacing assets/liabilities for "candy bars/frog legs". See if it still makes sense.