Mike: So I’ve read this book and it says you don’t need to spend your life working for money Sarah: Yeah ok, how are you supposed to eat and survive without working? Mike: The book says that you can make your money work for you... Sarah: Erm… what’s it trying to sell you?....
...2 years later
Sarah: Do you realise our old house is making us money every month and we don’t even live in the same continent! Mike: Do you remember that book I told you about?...
The conversation didn’t go exactly like this but I hope it gets the point across. I do remember Sarah thinking I was deluded talking about these things but one little book definitely changed me for the better a few years ago.
The cheesy title puts a lot of people off even picking it up but the messages throughout ‘Rich Dad Poor Dad’ made me think about a lot of things in life in a different way. The definition of an actual “asset” and “liability” made me consider what we should do with our hard earned cash.
An asset is something that makes you money every month.
A liability is something that costs you money every month.
We often end up with more liabilities than assets, and sometimes we even consider those liabilities to be assets!
I remember when we were looking to buy our first house in 2012 because we didn’t want to ‘throw’ money away every month by renting. The truth is that even when you buy a house that is exactly what you continue to do. Yes, you may have a repayment mortgage or no mortgage at all. But, unfortunately, you are spending money every month through bills, interest, council tax, internet, TV licence etc. The price of the house may increase and it probably will in the long run due to inflation. I’m not saying don’t buy a house, however, it is important to understand that the truth is, wherever you are living, whether it’s rented or bought, it is a liability.
It wasn’t until we moved away and started letting the house out that we really understood the difference. All of a sudden the thing that we spent the majority of our income on from working full-time jobs, started paying us money! Don’t get me wrong we couldn’t quit our jobs and live off this but it was what we learnt from it that gave us this lightbulb moment…
Rather than spend all our money on things that end up costing us more money (car, TV, house, phone, internet) why don’t we start looking to spend our money on things that make us money each month?
Now I know this sounds obvious and if you're anything like me your first thought may be… “but aren’t those things expensive?” The short answer is “no!” There are affordable ways to make your money work for you.
The book, ‘Rich Dad, Poor Dad’, talks about how there are 4 main asset classes:
Property Business Commodities Paper assets
Without going too much into detail about each one, here are some simple examples:
Property: You can find a deal and sell it on, without ever having to spend ANY money. You can rent from a landlord and rent it on to someone else for more money, without ever having to buy it. You can borrow other people's money (banks!). You can find someone who invests in property and they can offer a MUCH higher % return on your money for as little as £5,000.
Business: You can set up an online business for less than £100. You can raise capital without ever having to put any of your own money into a business. You can start a network marketing business for little to no upfront money.
Commodities: Include metals (gold, silver, copper, etc.) food (grains, corn, coffee, and sugar) and raw materials (oil, gas, cotton, etc.). Commodities are generally a capital gains or loss, investment. You can buy a silver coin for £10.
Paper Assets: These are assets like stocks, bonds, mutual funds, and retirement accounts where you can invest in stock options, stock futures and foreign exchange. You can buy REITS (Real Estate stokes/ the equivalent) with hardly any money (also property exposure). You can buy these for less than £100 and you can get cash flow via dividends or go for capital growth.
If like me, when you read this you think “but I don’t know how to do any of this!!” That’s the point of the book!! Finding things out in today's world is very easy, and quite often free. We are living in the information age now and with the internet, you can find out almost anything instantly. If you can’t, you can guarantee there is a meetup or seminar which will go into more detail close by. Gain Financial Education.
Yes, it takes time and practice to perfect any of this. However, would you rather spend your time and money on building assets that continue to put money into your pocket? Or would you rather work for someone else for your whole life not knowing if you will even get anything by the time you reach retirement?