Tuesday, October 26, 2010

Asset & Liability: Take these Words to the Toy Store

Last night, after the "tucking in," I put my feet up on the sofa and read Robert Kiyosaki's 2004 financial  literacy book Rich Dad, Poor Dad for Teens. It's an easy read, an hour or two tops, and worth going through with your kids even though it was written for an American audience. And be prepared. The book will inspire some lively debate with your kids about the stuff in your lives: what is an asset and what is not.

 Assets & Liabilities
As Kiyosaki points out in his book, the difference between an asset and a liability is this: an asset puts money in your pocket, while a liability takes money out of it. It's all about balance, or should I say imbalance. Ideally, we want to have way more assets than liabilities and getting there starts with understanding the difference between the two words.

What is an asset?
An asset puts money in your pocket. It pays you to own it. For example, your investment portfolio should be an asset that pays you income in the form of interest, capital gains or dividends (and if it's not an asset, get help!). A rental property is an asset when the renters pay their rent. And, your home can be an asset too, assuming that you don't lose money when you sell it. Collector's items and artwork can be can assets if their value goes up. Assets pay you. They generate income.

I have pointed out to my six-year old that "silly bands" (the latest trading craze for kids) are not, by definition an asset unless she saves them until she's my age and they become collector's items. I'm not optimistic that silly bands will be worth anything in 2046, but she, who owns 78 of these cheap rubber bands that sell at the insane price of 24 for $4.99, disagrees. "They're NOT a liability, MOM!" she told me while headfirst in a bin of silly bands at Toys R Us madly searching for a Western-themed package to go with her Halloween cowgirl costume.

What is a liability?
A liability is something that takes money out of  your pocket. The truth is, almost all the stuff that we own is a liability.  For example, my computer, my new TV, my car, my clothes, my books, my kitchen appliances, my daughter's Littlest Pet Shop collection and those silly bands, of course, none of these things can be sold today for a profit (not even on Craig's List). Debt is a liability too, although like your home it can be an asset if that money is being saved and invested to build wealth such as in an RRSP. But, in general, any money you own is a liability. And don't forget taxes. Talk about a personal liability; the 12% HST is killing me.

Getting back to Kiyosaki's Rich Dad Poor Dad, the bottom line is imbalance. You want to have more assets than liabilities in your financial life. I also appreciate his observation that the rich and poor speak differently about money. Kiyosaki says that the "rich dad" mentor in his early years taught him to spend his money on assets, while his real "poor dad" seemed to unconsciously focus on acquiring liabilities and then complain about them. It was "rich dad" who spoke about and taught him the difference between an asset and a liability. That is powerful vocabulary to pass on to our kids.

So while I'm not happy about my daughter squandering her pocket money on silly bands, I am happy that she is beginning to understand the difference between an asset and a liability. In the end, all I want her to learn from these early spending experiences is the vocabulary, this powerful, life-shaping vocabulary.

Copyright 2010. Laura Thomas. All Rights Reserved.
For reprint permission contact money@agentstory.net

No comments:

Post a Comment