This is Why You Should Not Buy Liabilities First

July 18

In my article "When You Think You Can't, Ask: How Can You?" I mentioned that one of my dreams is own a Honda CRV. Currently this sleek SUV costs 1.4 Million Pesos.

However, earlier, I saw an Instagram post that reminded me of one of the most important lessons by Robert Kiyosaki.

"Don't buy liabilities!"

Another warm greetings to you my dear read_cash family. It's another warm Saturday after here in the Philippines. (At least on this part of the country).

Before anything else, I would to express my gratitude to my new sponsors JonicaBradley and Biyaawnur. Also for LykeLyca for renewing her sponsoship. Also I would like to say thank you also to the rest of my sponsors.

I suppose that everyone here is dreaming of owning a brand new car. Maybe a different brand and make. Some maybe worth more that 5 Million Pesos or even more.

I have a confession to make.... my very first dream car was not a Honda CRV. It was a Porche... But I think the latter will remain in my dreams only... I can't even imagine myself behind the wheel of that luxurios sports car.

Anyway, here's a question, If you have 5 Million Pesos (that's about USD 100,000) will you buy your dream car right away? Assuming your dream car costs less than 2 Million Pesos. That way you will have at least three Million Pesos left.

Probably you would say yes, right?

Ask me what my anwer will be...

It's a NO!

Why?

It's a Liability.

You might be thinking, I am confused with the definition of a libility and in contrast, asset. I know that most people would consider any property that worth some amount an asset.

And before you make a violent reaction and attempt to throw your cellphone at me for my apparent "stupidity", read on and let me explain.

Assets and Liabilities.

Let's define these two as the accountants would present them.

Asset

In accounting, anything of value that a person or firm buys. Assets can be physical, such as real estate or stocks, a claim on debts, such as accounts receivable or liens, or a right, such as a patent. Of crucial importance to assets is their relative liquidity, or the ease with which they can be converted to cash.

- Source: https://financial-dictionary.thefreedictionary.com/asset

Liability.

In personal finance, liabilities are the amounts you owe to creditors, or the people and organizations that lend you money. Typical liabilities include your mortgage, car and educational loans, and credit card debt.

-Source: https://financial-dictionary.thefreedictionary.com/liability

Let me get this clear. If you took out a loan to buy a car then your car loan is your liability. The car itself is considered an asset. So, if you bought it in cash then you will have an asset with no liability. At least that's what will appear if ever you file your Statement of Assets and Liabilities.

To make it clear, if you have a house and not paying for any mortgages, you have an asset there with no liabilities, right?

At least that's how it will look like.

In our example, you have 5 Million Pesos and used 2 Million Pesos to buy your dream car in cash! As defined above an asset is "anything of value that a firm or person buys." It's 2 Million Pesos worth so it's definitely an asset.

Let's take a look at these words again as defined by Robert Kiyosaki in his book Rich Dad Poor Dad.

What is an asset?

The simple definition of an asset is something that puts money in your pocket.

What is a liability?

The simple definition of a liability is something that takes money out of your pocket. Common liabilities include things like cars, vacations, clothes, eating out, unused subscriptions, and more.

Simply put, if it puts money into your pocket, it's an asset. If it takes money our of your pocket, then it is a liability.

Now's let's see if a car is really an asset or liability.

The value of the car is 2 Million Pesos. However, there is this thing called depreciation. Depreciation is the gradual loss of value of an "asset" (asset in accounting terms). The moment you drive your car, it starts to lose it's value. Thus after a year, it will no longer worth 2 Million Pesos.

Then comes the fuel expenses. With the skyrocketing fuel prices lately, I don't think two hundred Pesos ($4) is enough for a day. Hmm.. that's only about two liters of gasoline. Do the math how much you are spending on fuel per month.

Then after the free maintenance expires, that's additional expenses for you as well. So is a car an asset to you or a liability.

Now, let's say instead of buying a 2 Million Pesos worth car, you bought a piece of real estate property worth three million pesos. But you did not pay in cash. You loaned from a bank and converted it to a four-door apartment which you rented out for 10,000 Pesos a month for each unit. Let's say, you are paying the bank an amount of 25,000 Pesos a month for the mortgage. But, you are earning 40,000 a month.

Although you are paying a monthly mortage, you are earning at the same time.

What do you think, is the real estate property an asset or a liability?

This is Why You Should Not Buy Liabilities First

As explained, assets are some things that put money into your pocket. With these additional income, you will be able to earn more than enough to pay for your liabilities.

In my example above, your income from the appartment units will enable you to earn to pay for a car loan... or better yet, another property thay will earn you more income. That's why you should not buy liabilities first.

But assets firsts, then if you have more than enough assets, that's when you can buy liabilities.

In Closing.

Let me close this by sharing something personal. I wanted to start my own business. But after a failed family business that cost us our properities, I have been try to start one without getting into debts. So I start small. When I want to buy something that will cost me more than I can afford, I always think first, "Will this put money in my pocket?" or "Will it help me save money?"

Like when I wanted to have a phone with a good camera, I decided to get one through Globe's subscription plan. I know it meant additional monthly expenses. However, I paid my monthly bills from what I have earned using my phone. There was even some months that I earned only using my phone.

Same thing when I decided to get a new tablet worth 18,900 Pesos. (And I considered as a loan from myself for myself. I will explain this next time). I intend to use this tablet to earn more online.

Thus, my rule of the thumb before buying anything that involves huge amount is, I ask myself "Will this put money into my pocket? How?"

May achieve your dreams.

Thanks For Reading.

Author's Notes:

The content of this article is for educational purpose only and not intended to be a financial advice.