This is the Cash Flow Pattern of an Asset

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LukeLewis

LukeLewis

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Mike's father (rich dad) explained it perfectly when he said, "Assets put money in your pocket." Forget about all of those fancy definitions, if you aren't an accountant. Accountants need to know the nuts and bolts of a lot of irrelevant things. That is, irrelevant when it comes to real life. If you're not dealing with corporate accounting, don't concern yourself with the book definition of what an asset is. Just remember, if you buy a car for your own personal use, you haven't purchased and asset. If you purchased a house for your family to live in, you haven't purchased an asset. If you purchased a piece of land, you haven't purchased an asset. If you've done all these things, you can't say to your friend, "Boy, I've got a lot of assets." You don't. These things don't make you any money. Actually, they do quite the opposite.

So what is the cash flow pattern of an asset? It's like this:

Assets ---> Income

If you bought a car to rent out to people and those people pay you more than what you're paying for the car, you have purchased an asset. If you have purchased a home to use as an Airbnb, rental, or lease and you're making more money on it than you spend on it, you have purchased an asset. If you have purchased a piece of land that's being rented by a local farmer and you're making more money on it than you spend, then that's an asset too. Even if you buy an ETF that's earning you dividends and capital appreciation, that's an asset.

Assets aren't merely things that have worth. This is where people get it wrong. Assets are actually things that earn you an income. I'd even venture to say that the asset doesn't need to earn you more than you spend, if you're waiting for a large payoff in the future. For example, let's say you bought a house to rent out to people. You may break even on the income part of it, or perhaps lose a bit of money, but those renters will likely be paying for a large portion of the mortgage and other bills. If this is happening, you'll be able to pay the house off completely just with the rental income and then sell it for a lump sum in the future. So just because the money isn't coming in today, that doesn't mean it won't come in tomorrow.

Bottom line: think about income when you think of assets. Don't just think about things that have worth today, but are depreciating every minute that passes by.

This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki
 
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This is the Cash Flow Pattern of an Asset was posted on 06-05-2021 by LukeLewis in the Finance Forum forum.
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