The rich buy assets, the poor liabilities and that is a secret of getting rich!

in LeoFinance3 years ago (edited)

Rich versus Poor

What big secret do you need to learn to become rich, and without it you stay poor?
The difference between Assets and Liabilities.

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The Rich buy Assets, the Poor Liabilities

If this sounds simple, it’s because it is...the truth even when simple, may be hard to execute.

If it doesn’t grow, the answer is no!

A simple rule of thumb for large purchases for the growth minded. If what your about to spend a lot of money on isn’t going to increase in value or grow in value, you probably shouldn’t buy it. Seriously,
Many people are perfect consumers, they buy everything, the latest phone, computer and latest style of shoes, shirt, coats or pants. Often these new items replace old items which were working fine! The irony is these same people don’t have money to spend on investments and their personal balance sheet is a mess. They very few things which grow and lots of things which shrink in value.

Accumulate Assets, not liabilities

If you want to be rich, you need to stop accumulating liabilities, especially debt liability, as in things you pay for once that shrink in value or in the case of debt liabilities, things you buy on credit and pay for over time.

Good Debt versus Bad Debt

The exception to the simple rule of accumulating assets versus liabilities is the difference between depreciating liabilities and appreciating liabilities. A depreciating liability like a car is a debt, that most people pay for over 3-6 years, but the value of the car frequently shrinks faster then the debt incurred to pay for it. So that frequently people find the debt for the car becomes greater then it’s value.
This is different from a debt like precious metals or fine art. Those are appreciating liabilities, and even if they aren’t paid for and represent a monthly outflow on your balance sheet, they may increase in value fast enough that you never owe more then it’s worth.

Accumulate assets not liabilities, and if you must incur debt, make sure it’s an appreciating liability.

@shortsegments

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@leo.voter

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"the difference between depreciating liabilities and appreciating liabilities."

You nailed it with this statement.

"If it doesn’t grow, the answer is no!"

I'm totally going to use this in my vernacular.

And the post is short and concise. Outstanding job @shortsegments!
Reblogged.

Hi
Thank you, I worried the first was to complicated and the second to simple, but I hoped together they would be remembered!

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I really liked those two phrases too. They said so much, using so few words.
Potent Stuff!
Thanks

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I really liked those also!
They are etched in my brain! :)

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This is one reason why the poor remain poor and the rich becomes even richer.
I think poor people are not financially enlightened enough to make decisions like this as they are not aware of it.

This is an eye-opener also for me.

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Exactly! Financial Education and reasoning skills using math are in sufficiently focused on in education.

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Exactly,
You state the most important point, the lack of financial enlightment, basically financial understanding, is the reason the many people get entrapped in debt.

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I second your thought. Thinking of rolling enlightenment programs to this cause

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I like that Financial zEnlightenment.
It’s as if someone has shone a light on the answers to important questions or focused our attention on important concepts.
Good post!

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I was reading yesterday a tweet from Peter McCormack...hope I haven't wrote his name wrong, that he took a $46,000 credit that he has to pay in 6 years to buy 2.55 BTC. I was thinking of taking credit for crypto for a few months but I'm unemployed and nobody gives me credit. I don't get people taking credits,huge amounts, for cars though. Those depreciate a lot.

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Hi
I think appreciating liabilities are a two edged sword. Yes they are appreciating, but the situation requires great caution, and close examination of capitol preservation, so you can at anytime get out and pay off the debt, if the monthly payment gets to big. That’s the basic problem with depreciating liabilities, you can’t take it back and payoff the debt.

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Thank for Sharing!

Buying less Liabilities and more Assets can be richer gradually.
We should be practiced.

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Exactly, we are all tempted, but if we practice control, we get better!

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I think this is a solid principle to learn. Your post is brief, but convincing.
Thanks

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