In this blogpost I want to share some thoughts on the understanding of “being wealthy”.
I’ve been interested in that topic for quite a while now and in the past I spent quite some time exploring the mindset of wealthy people and try to understand what they have in common when it comes to their thinking about wealth and money.
Money seems to be a topic that most people don’t want to talk about or just feel uncomfortable talking about but I will cover this topic in another blogpost.
Understanding the difference between an ASSET and a LIABILITY is essential and will make a huge difference in your personal as well as professional financial life.
It is the difference in mindset that let some people become more wealthy than others. While the average person tend to spend more money as soon as their salary increases, wealthy people tend to keep their standards but invest more as soon as more money flows in.
Most successful people are not hunting for the money but they have bigger goals in mind and money is just something they leverage in order to reach those.
Therefore wealthy people are heavily focussing their efforts on creating assets instead of acquiring liabilities.
Basically, the difference between an Asset and a Liability is simple:
An Asset generates money and puts it into your pocket wether you work or not.
A Liability takes money out of your pocket.
To give you a better understanding of what an asset is here are a few examples:
A typical example for an asset could be a book that you published that generates frequent income. Your initial investment is high, but once you created it your involvement gets less and less.
An example for a liability could be a car that doesn’t create any further income after you bought it. It creates costs for maintenance and gas and therefore takes money out of your pocket.
What most people don’t get
It is as simple as that, yet not many people seem to see the difference and I’m always wondering why people would spend more and more money on acquiring liabilities that they don’t really need.
And most of the time this habit ends up in a deadly downward spiral which is called THE RAT RACE.
With the following illustration I will try to explain simply what a rat race is. Do keep in mind that this example is extremely simplified.
- Imagine a guy at the beginning of his working career. He finished university and started his first job. As any other student, he didn’t have a lot of money to spent. But now with his first job, he can move into his own apartment and start to save and “enjoy” life.
- Since work life is tough, he uses the weekend to relax and go out with friends. At some point in his life, he finds a nice woman. Further down the road he decides to propose and they get married.
- After a couple of years, they saved up a bit of money and decide to build a “dream home” for their little family. Therefore they go to the bank to take on a loan. Each months they have to pay a certain amount back.
- At one point in life they also want to go on holiday. But traveling as a family is very expensive and therefore they need to save up a bit of money and make compromises.
- (1) Now with more experience he wants to earn more money in order to increase the living standard for his family.
- (2) He typically has two options: asking for a raise and getting promoted or looking for another company with higher compensation.
- (3) Because the family is growing and they just got another child, they decide to buy a family car to increase convenience. Since a car is also very expensive, they have to get another loan to pay for it. Now they have to pay a mortgage and a loan.
- the cycle goes on…
As I mentioned before this example is very simplified but if you be honest to yourself there is some truth to it and you can probably see it already in your circles of friends.
There is absolutely nothing wrong about having a family or building a home for yourself, but if you want to reach independency and financial freedom you gonna have a hard time.
Therefore it is important to think about how you imagine your life to be and start to create a plan for it.
By focussing your energy on creating assets and several income streams, you will be in a better place to get out of the rat race.
It will definitely not be easy and requires a lot of energy and as everything in life it will cost you something that you must be willing to give.