Most people consider all assets the same. They define an asset as follows:
“Something one owns that has monetary value.”
This definition is widely recognized and accepted. Using this definition, you could make a list of the many assets you own. This list might include:
- A car
- A collection of baseball cards (or some other collection)
- Video game system
- A bike
- Some furniture
- Cash in a bank account
Your list could keep going, but you get the picture. This idea of an asset being something of monetary value is verified because you could always sell that item for cash and use that cash to buy a different asset. For example: if you sold your car and used the money you got to buy a new wardrobe, you are merely transferring the value or worth from one asset to another. And since you can do that, it proves that your car has value.
But, if you have absolutely no artistic ability and you sketch an ugly picture of your neighbor’s dog, that picture would not be considered an asset using the above definition because it has no monetary value. In other words, you could list that ugly sketch on eBay, Craigslist, and Facebook Marketplace, and no one would pay you for it. It is not an asset.
This is where most people’s definition of asset ends. But a Freak knows that not all assets are created equal.
What’s a “false” asset?
Robert Kiyosaki, an author and speaker about personal finance, has become famous for describing most assets based on the traditional definition as “false” assets. He says that most assets take wealth away from you. Therefore they are “false assets.”
His definition of a “real” asset is, “An asset that puts money in your pocket. An asset should generate income on a regular basis.”
Let’s discuss this a little more because it’s super important. Let’s look at that video game system you have, which most would call an asset. If you sold it to a friend you might get $200 for it. So is it worth $200? Yes. But as it sits in your room, it doesn’t matter how much it’s worth because it’s doing nothing for you as far as building wealth. As a matter of fact, every day it’s in your possession, it actually costs you money because it’s losing value. If you sold that same video game system to a friend a year from now, you might only get $100 because it’s a year older and doesn’t have the newest features. This decrease in value is called depreciation. As time goes by it loses value, thus costing you money. Also, if you did sell it for $200, you now no longer own it so it can never bring you money again.
Freak Speak: Depreciation = A reduction in the value of an asset over time, due in particular to wear and tear.
How about a car? Again, most would say that is an asset, too. But not based on Kiyosaki’s definition. A car doesn’t make you money. In fact, it costs you lots of money just to have it. If you add up gas, insurance, oil changes, other maintenance, and its deprecation, it can cost you hundreds of dollars a month. But you might say, “I need a car!” Maybe. If you have a car, it’s not necessarily the end of the world. (I own one.) You just need to realize that it’s not a real asset because it’s not making money for you; it’s taking money from you.
What’s a “real” asset?
So what’s an example of a real asset? The answer is anything you own that creates passive or portfolio income. (See Post 4) For example, let’s say you owned some stock in Google or a condo that you rented out to tenants. These are considered real assets because they don’t cost you any money to own and keep (yes, they cost you money to acquire them, but so did that video game system) andthey make money for you. Each month and each year those assets will bring money to you just because you own them.
In a box: If you own a condo that you rent out it will cost you money (mortgage payments, insurance, property taxes, etc.) But the rent that you would receive from your tenants would cover those expenses and then some. So you actually end up making money. There is much more to cover here about how real assets work and the risk that these assets have, but for now, just know that a real asset puts money in your pocket instead of taking money out.
Here are some examples of real assets:
- Rental properties
- Publicly-traded securities
- A business that generates income
Knowing the difference between a real asset and a fake asset is crucial in your path to financial independence. It’s super important. This does NOT mean you cannot own any fake assets. You just need to understand how they take away from your net worth over time and use that knowledge to make the best decisions for yourself.