buying assets, not liabilities

What it means to buy assets not liabilities.

What It Means To "Buy Assets, Not Liabilities"

By Andy Garrison, MBA, CFP, Wealth Advisor

Briefly defined, an asset is something that can make you money while a liability is something that either costs you money or prevents you from making money. Knowing what each means, and how to use them, will be one of the biggest determinates of your financial success.

Why Assets Are Powerful

Assets are powerful because they make you money, which you can then take and invest in more assets, and so on. This creates a powerful cycle that allows your wealth to grow and compound exponentially over your lifetime.   

Why Liabilities are Destructive

Liabilities are so destructive to your wealth building for two reasons:

  1. They take money away from you that could otherwise be used to grow and build your net worth through purchasing assets, and
  2. They make somebody else richer at your expense 

If you are spending your money on things that prevent you from purchasing assets and making money, or on things that cost you money (and especially if you borrow to do so) you are transferring those funds to someone else who is buying assets with them.   

For every dollar you spend on a liability, it's approximately a reduction of $8 of net worth over the next 20 years!   

When You Buy Assets Over Liabilities, You are Purchasing Something that Grows Exponentially

Assets compound over time for two main reasons.  First, your earnings continue to grow exponentially through the basic principle of compounded interest. Second, when your assets generate income you can use that income to buy more assets.   

As your assets create income and compound over time, you experience incredible growth and work your way towards having more income from your assets and investments than your paycheck. This is financial independence!

A High-Level Example 

Let's assume you have $10,000. If you were to take that $10,000 and buy an asset that gets you a return of 10 percent (for simple math), then the following year you would have $11,000, and 10 years down the road, you'd have approximately $25,900. Over 20 years, that $10,000 would become roughly $67,200. 

If you were to take that same $10,000 and instead buy a liability with it, you would not only miss out on the growth of the $10,000 working for you, but you will also likely be paying more than that to a bank for the privilege of borrowing money.

What's the point? Instead of having $11,000 next year and $25,900 in 10 years, not only would you not have any of that, but you'd also be in the hole for the original $10,000 because it went into someone else's pocket. After 20 years, purchasing a $10,000 liability versus an asset would, in this example, cost you $77,200! Even more, you'd be on the wrong side of the curve and much further behind in your goal for financial independence.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.