Asset and Liability

Kiyosaki, meanwhile, chooses to retire at 47, living off of growing investments. He stresses that it’s not how much money you make, but how much you keep, and goes on to point out numerous examples of once rich celebrities or businessmen who died poor. He again repeats the importance of being financially literate – a point that his rich dad drilled into him as a child.

Kiyosaki says that you must build a strong foundation of financial literacy to make your money work for you. There are several rules to help you accomplish this – Rule One is to “know the difference between an asset and a liability, and buy assets.” His rich dad stressed that this is the golden rule to getting rich – buy only assets, and you will be rich.

His rich dad went on to define an asset as anything that yields money, while liabilities drain money. The real struggle lies in identifying what is an asset and what is a liability.

Kiyosaki believes that more money is often not the answer to people’s problems. People facing serious debt have often established a financial pattern that is difficult to reverse, even if they acquire a large sum of money or increase their income.

He describes a scenario in which two well-educated, recently married individuals move into together. After a while, they find the apartment is too cramped for kids and want to move into a home. As their incomes increase, their expenses also increase. They buy a dream house and find that now they must pay additional property taxes. They also accumulate credit card debt and mortgage debt, increasing their liabilities.

Kiyosaki points out that their spending habits are really the root of their problem. He notes that self-awareness is one of the most important characteristics to cultivate if you’re aspiring to be wealthy.

He goes on to debunk the idea that a home is an “asset.” He points out that most people never actually own a home – they continue to move and pay off new 30-year loans every time they move. In addition, homeowners end up paying exorbitant property taxes. He shows that houses do not always appreciate in value – in fact, they often depreciate. Lastly, he suggests that if your income is tied up in a house, you are not free to use your wealth to invest in assets.

He believes that no one is wealthy until their assets provide a cash flow equal to their monthly expenses. In summary, he restates that the rich gain their wealth through buying assets, while the poor only have expenses and the middle class buys liabilities which they perceive to be assets.