The rich buy assets, the poor buy liabilities

The phrase “The rich buy assets, the poor buy liabilities” became famous with the book Rich Dad Poor Dad as it was one of the lessons Rich Dad allegedly taught to author Robert Kiyosaki. The book is a worldwide bestseller, but it’s been criticized on many of the points it advocates.

picture money can't buy happinessI’ve been thinking about that phrase – Rich buy assets, poor buy liabilites – I’ve been thinking about it quite a lot. Especially since our newlywed money and finance is not in a great shape. Is the secret key to getting rich that simple – just buy assets instead of liabilities?

It makes perfect sense to put your money into stuff that pays you back – like a rental property or a stock portfolio; investing is all about putting money into stuff that will help you make more money later. But us humans are so gullible! We have a hard time saying “no” to that seductive, shiny, brand new flat screen that is way cooler than the flat screen Peter bought last month (and made rounds at the office bragging to everyone about it). So we buy it and do a little Tarzan-style victory dance in front of Peter’s desk. Take that, Peter!

According to Kiyosaki, the rich invest their money by buying things called “assets” – things that put money in your pocket like rental properties or stock portfolios. The poorspend their money on things called “liabilities” – things that are basically money-pits and never put money in your pocket. Like that flat screen we were eager to rub in Peter’s face.

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Let’s say Person A and Person B each make $4000 a month. Person A uses their spare money to open a savings account and earn interest, to pay off a rental property and earn rent, to buy some shares and earn dividents. Person B uses their spare money to buy a car, a laptop, and fix the roof on their house.

While they earn the same amount of money, in 5 years Person A will be better off than Person B, because their assets will be bringing them money and thus Person A will have increased their income.

Poor Person B.

My husband and I have been “Poor Person B” ever since we met. We try to save, but what little amount of cash we are able to pile up is soon gone. The first little pile we saved went to pay off the used car we bought. Then we saved a second little pile but it went towards our wedding. Still we didn’t quit: we saved a third little pile. Guess what happened to is?Off it went to the apartment remodel (mentioned here) that we had to do to make our home baby-friendly. And just last month we bought a furnace, a new front door and paid the annual car insurance. Sheeeeeeeesh! Basically, we keep saving and saving, and the result of all our squirrel-ly efforst is simply that we can prepare our home for the baby without getting in debt. Yep.

So whenever someone casually mentions “The rich buy assets, the poor buy liabilities,” I get a little pissed off. It makes getting rich sound so simple! The rich buy assets, and the stooopid poor people buy liabilities… WELL HEY WE ARE NOT STUPID, MISTER RICH DAD! WE BUY “LIABILITIES” LIKE A FURNACE OR A COUCH BECAUSE WE ACTUALLY NEED THEM! GAAAAAAAAAAAAAAAAAAAAAAAAAH!!!
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Phew! Feel much better now! :)

Back to the topic.

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It’s easy to blame the poor for their condition and say “Well, if you’d only bought some assets…”

But it’s one thing to buy assets when you have all the “liabilities” that you need (e.g. car, laptop, furniture), and it’s a totally different thing when you’ve just moved into a bare new apartment. There are certain things that you need, at the very minimum, to live a relatively normal life:
bed
wardrobe
kitchen table + chairs
fridge
stove
sink
toilet seat
water heater
AC or equivalent
washing machine
iron
clothes
food

And there are things you could do without but if so, your life would be so much harder:
car
computer
TV
microwave
cell phone

And let’s not even get started on the heavy stuff like windows, doors, roof panels, floors and so on.

It’s been 1 year since my husband and I met and this whole year we’ve tried to not waste money. We’ve made an effort to save, but it feels like we’ve made little progress.

When we moved out of his parents’ 3-bedroom apartment into our 1-bedroom apartment, there were many things we had yet to buy for the place. A microwave, furnace, curtains, new door, dresser… and we still need to buy a small TV for the kitchen, a laptop (yeah our old desktop is ready to go) and a couch.

But a microwave or a laptop doesn’t feel like progress. It feels like catching up.

We hope to be done with the “catching up” by the end of the year, and we probably will be, but then we’ll have to buy baby stuff like crib, stroller, clothes and whatnot.

Sigh.

I guess those are just the seed money for starting a family. One year from now, we won’t have to buy much because we will already have a microwave, AC unit, baby crib, car. And when baby #2 comes, we could just use the stuff from baby #1. I think we’re heading to a financially better place in the future. We will probably be earnign more by then, too.

Maybe then we could finally set aside some money for investing? I’ve been eyeing a thing or two for a while now.

But until then, I’ve made my peace with at. It may be true that The rich buy assets and the poor buy liabilities, but there’s another saying that’s true first: Takes money to make money.

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6 thoughts on “The rich buy assets, the poor buy liabilities”

  1. The saying is right of course. And yet you must compare equal people.
    If you earn 500 levs a month, you can’t save much. And so you don’t have the choice whether to save or not.
    If you earn 2000 levs you have the choice whether to save or to spend and on what.
    It is not a problem if you earn 500 and stay poor. But it is a problem if you earn 2000 and still stay poor. And I know such people.

  2. I am coming again back to my point – if you want to start something, it is easier to do it with loaned/other people’s money. For example, I bought one of my flats quite impulsive – it was a good proposition, I went to the bank and took a loan to buy it. To get a good interest, I agreed to repay it in 3 years. These were quite tough years in my life, I would say. The loan created a big monthly commitment, which felt stressful on occasions, but I’ve pulled it through. If I had simply decided to save th emoney for the flat instead, I would have never succeeded as there were always new opportunities to spend.

    yes, I know a loan is worse than savings, but in my case it worked as it enforced more discipline on my home budget and I also managed to mitigate the loan interest cost by letting my new flat for two years.

    Would I want to do it again? No,not unless I really have to. During the last few years I mantain a stable saving feed, although this is possible due to me earning a lot more than before. And even now life constantly throws unwanted and unexpected expenses at me, which only fragment my saving timeline.

    Taking a loan to acquire an asset or start a business however, can definately help if you’re not earning enough.

  3. Yep :)

    I don’t think there’s really an “excuse” for staying poor or broke, but sometimes the circumstances are stronger than you are. And yet if you do your best, you can pull yourself out of the quicksand. It’s not easy, but it’s doable.

  4. Okay, but you’ll have to give some more details to your story! Where you single when you took that loan? How much was the loan in terms of your monthly salary? How was the real estate market back then? How did you come across such a great deal? What did you do with it later?

  5. Ok, I can share some details. I too, like many people like detailed and real life stories.

    I bought my flat back in 2007. The property market was at its peak (not the best time to invest), but the doomed end to the growth wasn’t noticeable then and there was a slght pressure of urgency to get on the train. By the way, that wasn’t my main motivation then to be honest.

    A friend called me one day and said – I am buyng a holiday flat, I ound a perfect apart hotel, being built by a reputable company. This fining was the result of a 6 month market research and he is a good friend of mine, who runs multiple businesses in Bulgaria, so I naturally trusted his findings.
    So, he was buying a flat in Sunny Beach resort and invited me to buy th eflat next door to his. The deal for him was obviously that having a two one bedrooom flats is a good idea to rent to a bigger parties of holidaymakers, an I also had the suspicion that he’s got a referal cash bonus, but I’ve never found out.

    So, I went to see the flat, which was still in a building phase. Buying a flat before it’s fully built brings you some discount, but also risks.
    I was working in Europe at that time and decided to go for it.

    The advertised price was 43000 euros, and if you pay in cash before completion you get 3000 euro discount. I only had 4000 euros savings in the bank then, so I had to get some cash from somewhere.
    I then went to my bank in Europe to talk. They told me that I cannot get a mortgage for this flat, but I could try for to get the maximum unsecured loan. I applied and had to prove that the loan repayments will not take more than 60% of my net income per month. I could apply for a max of 30000 eur, but I had to repay the loan in three years. This would make around 900 euros a month. I was earning around 2400 net pm, so I just about fitted in their financial frames. I applied.

    Not sure what helped me get the loan – was it my good credit rating or the pure passion and confidence in my eyes when I spoke to the bank manager. I have been since refused several times much smaller loans, so this was some sort of a magical moment goin against any logic or common sense. One of my great stories about how passion in business enables opportunities and make impossible things happen.

    So, I was 30000 richer, with a huge commitment every month. (1000 goes every month for rent and bills and another 200 for phone+travel, so I was left with less than 300 euro for food and personal expenses, which is not much at all). Not sure what I was thinking then, this was risky, but I had a permanent job and the internal feeling everything would be ok.

    I was right, as I only had to live three months on that skinny budget. I found a better paying job. The extra net income per month at the new place was .. exactly 900 euros :-)
    I also took a loan from a Bulgarian bank – around 5000 euros over 5 years, but the monthly payment was much lighter- around 100 euros per month.

    Never the less, 1000 was still a huge commitment for my budget and this lead to several stressful situations at work, where had I not had that loan, I would have walked away, but with the big loan I had to stay low and bare stupidity and long hours at work.

    Coming back to my flat. The building company indeed kept their word and finished the aparthotel in time. I had a brand new furnished apartment, two minutes from the beach. Great! I obviously couldn’t live there all the time, and that wasn’t the original plan anyway, so I had to make it work for me.

    Unlike the Monopoly game, there is a lot of work and facing uncertaintly if you want to turn your flat into a money making entity. Letting it via an agency did not make any financial sense and there were no reliable agencies around at the time, so I had to find clients myself.

    I set up a web site, learnt everything about Google SEO and Adwords, however the holiday market is ultra competitive and it costs a lot to shine there.
    After some time I started receiving requests from potential customers – most of them were Ukranians or Russians. My strategy was simple – I charge 70-80% of the typical price for this type of flats and give additional discounts for long bookings. Slowly the flat started to bring some cash in. First season saw 1000 eur profit, and the next seasons jumped to 1500 and 2000 eur per season. There were the obvious logistical challenges – cleaning, changing and washing the sheets, most importantly meeting the customers and collecting their cash. My friend’s vision worked fine (this is why he’s a good businessman) – half of our bookings were double – two families coming to spend the holidays together.
    Overally, this flat made some cash and still does. The good point is you only have to find tenants during the 4 months of Summer, the negative point here is that the market is really competitive, so you are not guaranteed bookings if you don’t move.
    It is a nice little asset, generating passive income, however the yields are minimalistic. 2000 euros per year make 5%ROI and that’s the best you can expect. It is definately better than 2.5 % interest on deposit given by the bank, although if you consider the effort required to make it work, it doesn’t make much of a difference.
    The whole venture taught mesome valuable lessons in business and market making.
    For those curious, th eflat value actually fell after the market crash and is estimated to be worth 36000 at the moment, not a huge drop (the location is good), but still it wiped 2-3 years of profit.

    Now for the profits – in absolute terms 1500-2000 euros (130-180 eur per month) is a great addition to salary, however 180 euros in Europe is not a huge amount – enough to cover your monthly travel pass.

    This is what I mean when I ay that you cannot get rich through investing and pasive income – the yields are too small. The best way to multiply your wealth is through developing a business.

    I have also tried many other investment vehicles in my life and can tell more stories if people are interested.

  6. Andy, thank you so much for sharing this! You really took some time to write it down for us, didn’t you :)

    I would guess that at the time you made the decision to go for it, you were single? Your whole plan was pretty tight and you had to really watch your “skinny” budget. Well, no profit without risk I guess, but once you start a family, your risk tolerance drops waaaaaaaay down :)) (By the way, my husband’s manager once pointed to a guy at work and said, “Behold, the perfect worker: two kids and a mortgage! Harrass him all you want, and he still shows up for work tomorrow!”)

    I agree with you that on paper, buying a rental place and turning a profit sounds like a no-brainer, but in reality there’s a lot of risk and uncertainty. Even more so in your case since you were – as I understand – physically away from your property.

    As for getting rich through passive income… it’s the other way around. You don’t create passive income to become rich, you become rich to create a passive income ;)

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