When it comes to making money, there are many ways to build wealth. There is certainly no one size fits all solution to earning more money. You might look for ways to advance your career, start a side business to bring in some extra cash, cut back on your expenses, or simply make smart investments, to name a few.
But no matter what method you choose to bring in money, if you want to build wealth, true wealth; there is one rule that you simply must follow. The way to build wealth is by having more assets than liabilities.
Now this may seem like a simple concept, and it is. But the problem often comes when you have a fixed amount of money per year and are faced with something you want that may be out of your budget. It is during that decision-making process when you must use sound judgment to decide if the value of your assets will allow you to afford the thing you want or need.
In order to figure this out, it is important to really understand the difference between an asset and a liability.
What Is A Liability
In accounting terms, a liability is defined as a future sacrifice of an economic benefit that you are required to make to someone else as a result of a previous transaction and may result in the transfer of assets.
In simple terms, this means you decided to sacrifice some of your future earnings because of something you wanted or needed and took out a loan or a line of credit. You are sacrificing something else you could have used that money for in order to pay your debt. Basically, a liability takes money out of your pocket.
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What Is An Asset
In contrasts, by definition, an asset is something that will have a future economic dollar value. It can be anything that is tangible (something you can physically touch) or intangible (can't be touched) that is owned or controlled to produce some form of positive economic value. So, an asset puts money in your pocket.
Some examples of assets may include: cash, inventory, land, investments, accounts receivable, and buildings.
Therefore, the key concept to build wealth is to have assets that bring in more money than you owe to someone else.
Is Your Job An Asset?
Now you may be thinking that you have a descent-paying career and your job is your asset, because you make more money that you owe. But by definition, your job is NOT an asset. You get paid to perform a service to your employer who rewards you with wages or a salary. You are essentially trading your time and experience for money. So unless you own the business, your job does not fit the definition of an asset.
Is Your House An Asset?
Have you ever heard the phrase, “Your house is your greatest asset”? You might be surprised to learn that it is not.
While your house is certainly a significant investment and will likely increase in value over time, it is not generating money for you. It is actually costing you money!
When you first take out a mortgage loan, the interest you pay towards the loan is higher than the amount that goes toward the principal balance. Why, because the bank wants to get its money first. If you analyze the payoff chart from your lender, you will see that the more time that goes by the more money that eventually goes towards the principle balance of your home.
So, if you take 30 years to pay off your house, you will probably pay nearly double what it is worth! That can be a scary thought, because even if you sell it after it is paid off, you will not get back the full amount you paid for it over the course of 30 years.
That does not even include the other expenses that you pay towards your home, such as, electricity, water, basic repairs and maintenance.
This is why your house is not really an asset for you, but it is certainly an asset for the bank that gave you your mortgage loan because they will make a significant amount of money from it.
What Are Good Assets To Have?
As mentioned before, an asset is something that puts money in your pocket. Some examples of assets are rental properties, investments, and businesses.
If you purchase a house for the sole purpose of renting to tenants, then it becomes an asset. The person who is renting the property from you will essentially be paying the mortgage for you and you will profit any difference between the amount that is paid for rent and the cost of the mortgage.
Financial investments can also be good intangible assets. If you have a solid portfolio with good investments they can build wealth over time. Compounding interest is your friend. The sooner you can get started with good investments, the more money you’ll make.
If you have your own business, that can also be a great asset. But also understand that a business will have it’s own set of assets and liabilities in order to operate. If opening your own business is something you've been considering, the age of the Internet has made it even easier for people to get up and running.
Here are some examples of online businesses you could start:
Selling products on Amazon
Many people have been able to sell their own, or other company's products on Amazon and make enough money to quit their 8 to 5 job. My friend, Seth Kniep, did just that.
Seth previously worked for Apple but realized he no longer desired to trade his time for money and he wanted to become his own boss. To raise money for his new business venture he took a single dime and transformed it into $100,000. Since then, he has become a successful 7-figure Amazon seller and is now teaching others how to achieve the same dream.
Seth created a group called Just One Dime where he offers an instructional course, personal coaching, and advanced resources to not only help you find highly profitable products to sell, but he also teaches you how to sell them. He covers everything from finding and sourcing products, shipping, product photos, and creating an attractive sales listing.
Start a proof reading business
Do you love to read? Are you pretty good when it comes to grammar? There is actually a very high demand for proofreaders worldwide. As a proofreader you take some content that someone has written and check it for correct grammar and punctuation. Some proofreaders, such as Caitlin Pyle, are even able to make over $40,000 working for themselves, on their own schedule, from the comfort of their home.
Sell Kindle e-books on Amazon
E-books are becoming more and popular. Many people are now reading books on their phone, tablets, or Kindle devices. So, have you ever thought about selling Kindle books on Amazon? This is one avenue that does not require a lot of start-up money and the process is fairly easy.
Stefan Pylarinos offers a thorough, comprehensive course called K Money Mastery, that shows you exactly how to get started creating your own e-books to sell on Amazon. He covers topics ranging from content creation, book cover design, sales listing, and promotions. He also goes into greater detail about scaling your business by showing you how to find and train inexpensive virtual assistants to decrease your own personal workload. Even if you are not the best writer, Stefan will teach you how to find others that can write your book for a small fee.
But if you have the passion and desire to write an ebook, Stefan can also show you how to write your own ebook in less than 24 hours.
What Can You Do To Build Wealth?
If you take nothing else away from this post, just remember; the secret to build wealth is to have more assets than liabilities. The sooner you can increase your assets and lower your liabilities, the more wealth you will create.
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Robert Kiyosaki stated that the key to creating wealth is to build up your assets first, and buy your luxuries last. This can be a difficult concept to master because we live in a society where we want the nice things sooner rather than later. We feel we can afford things now so we want to buy them, which often results in liabilities.
Sometimes we need to stop and think about better ways to use our money to our advantage and not purchase luxuries we want right away. If you use your current income to pay down your liabilities, you can start using your money to invest in more assets. Those assets will then generate money for you and you can afford to get those luxury items you want.