Robert Kiyosaki Blog

Financial Education Portal inspired by Robert Kiyosaki

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Asset or liability?

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Flexo takes issue with Robert Kiyosaki’s definitions of asset and liability:

An asset is something that puts money in my pocket.

A liability is something that takes money out of my pocket.

I can see Flexo’s point in that Kiyosaki is recasting the definition of the words.  The proper financial terminology would say that:

An asset is something that is owned, while

a liability is something that is owed.

I live in a house which has a mortgage against it.  I don’t really own the house yet, because I still owe tens of thousands of dollars on my mortgage.  (Even after that, I can readily find out who the real owner is if I fail to pay my property taxes.)  The home itself has some value.  I can sell it to someone for money.  It’s an asset in the financial sense of the word.  The mortgage loan is owed to the bank.  It’s a liability in the financial sense.

At the same time, though, I can see the merit in Kiyosaki’s definitions, as they’re more practical.  The financial definitions deal with cash value, while Kiyosaki’s deal with cash flow.

In terms of cash flow, my mortgage is of course still a liability for me.  But, my house itself is also a liability.  Maintaining it, removing mold, keeping it warm, keeping it clean, keeping it looking pretty, keeping it dry, etc., take a lot of money.  A house deteriorates just like anything else if it’s left alone.

Going back to the financial definition for a second, I can rephrase this statement by saying that the value of my asset, my house, will go down if I don’t take care of it.  It costs me each month so that the value of the asset isn’t affected by my carelessness.

In the cash flow sense, the house would be an asset only if I were renting it out for more than it cost me to maintain it.  That is, only if it put money in my pocket.

I’m not sure that clears things up at all.  If anything, it makes things more confusing.  If so, then I’ve accomplished something. 😉  Seriously, though, I do like Kiyosaki’s definitions because they bring the focus to the cash flow.  If you buy a boat, you have an asset, but while you own it it’s a huge liability — unless you get the credentials to boat people around for hire, in which case it becomes an asset.  Thinking about purchases this way brings the spotlight to the lifetime cost (or lifetime earning potential) of an item.  Maybe fewer people would buy boats if they knew that BOAT stands for “bring on another thousand.”

Anyway, what are your thoughts?

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Asset or liability?

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