Why Am I Poor? How to Stop Being Broke (Fast!)
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Are you saying to yourself why am I broke?
Well, today I'm going to explore the #1 reason why you are broke—and show you how to become rich by understanding this one simple concept!
You Buy Liabilities Instead of Assets
The reason you're not rich is pretty simple, you spend all of your money buying liabilities INSTEAD of assets!
There is more that goes into personal finance than simply how you spend your money. But, this is an important concept to grasp, and understanding it will help you avoid debt and build wealth!
This concept was explored in the book Rich Dad Poor Dad by Robert Kiyosaki. The concept explains why so many people are stuck in the middle-class—and will likely never leave!
Before I go any further, I want you to have a good understanding of assets and liabilities.
What are assets and liabilities you ask?
What Is an Asset?
An asset can be described as “an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.”
Basically, an asset is something you own that you can sell in exchange for money.
What Is a Liability?
While a liability is “the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events”.
Or in simpler terms, a liability is something that you owe to other people or parties. This could include an obligation to pay off your mortgage—or something like a car lease that you are obligated to pay.
Kiyosaki's Description
Robert Kiyosaki describes an asset as “something that puts money in my pocket whether I work or not.”
While he describes liabilities as “something that takes money out of my pocket.”
Now that you know what assets and liabilities are I'm going to explain why buying liabilities is keeping your poor!
Why Buying Liabilities Is Keeping You Poor
You are putting your money into things that depreciate or lose value—by purchasing liabilities.
Let's assume that you're upgrading your car every year to ensure that you're driving the latest model.
By leasing your car, you are essentially paying off the depreciation of the car for the first twelve months. Once the first year is up, you upgrade to the latest model and start the cycle over again!
This constant cycle of buying liabilities is keeping you poor!
Why Increasing Your Income Won't Make You Rich
It might seem that an easy way for you to solve this problem is simply to increase your income. This is potentially true, but your spending habits will dictate the benefit (if any) that you experience by getting a raise.
If you increase your spending whenever you get a raise it doesn't matter how high your income sours—become your spending will increase with it!
The Cash-Flow of a Middle-Class Person
Here is a diagram displaying the cash-flow of a middle-class person as found in Rich Dad Poor Dad.
This diagram shows that a middle-class person generates income from their job and uses that money to pay off their liabilities and their expenses.
Did you notice how the middle-class person has no assets that are generating them an income? The only money they earn comes from their salary—and it all gets spent by the time their next pay check arrives!
Now that you know how liabilities keep you poor, it's time for you to learn how to become rich!
How to Become Rich
Kiyosaki's secret to becoming rich is to “know the difference between an asset and a liability, and buy assets.”
Wealthy people focus on building their “asset column” on their balance sheet.
What Is a Balance Sheet?
A balance sheet is a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time.
Wealthy or “rich” people dedicate a significant portion of their income into purchasing income-generating assets.
The Cash-flow of a Rich Person
If you look below, you’ll find a diagram that can be found in the Kiyosaki’s book Rich Dad Poor Dad. This diagram displays the cash-flow of a rich person—or someone that is effective at accumulating wealth.
This diagram shows that a rich person receives income directly from the assets they own. They receive income in the form of dividends, rental income, interest and royalties.
Notice how the rich person also has vastly less overall liabilities and expenses than that of the average middle-class person?
This allows the rich person to invest a majority of their profits into buying more income generating assets.
Keeping your expenses low whilst dedicating a significant portion of your pre-tax income towards buying assets (10-20%) is a direct path to financial independence!
The Takeaway
There is one main thing I want you to take away from this article. And that is that you need to focus on purchasing income-generating assets and reduce your liabilities—if you want to become rich!
And remember, Kiyosaki's secret to becoming rich is to “know the difference between an asset and a liability, and buy assets.”
If you'd like to learn more about the book visit this post here where I explore the book—and two other great personal finance books! The 3 Best Personal Finance Books.
Otherwise, you can buy it here: Rich Dad Poor Dad (What the Rich Teach Their Kids About Money – That the Poor and Middle Class Do Not!)
What is your favourite kind of income generating asset and why?
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