Most Americans get up and go to work in order to pay the bills. Most of the time these bills are necessities such as rent, mortgage, healthcare, insurance, utilities, etc. As soon as most people have the ability to, they buy a nice car or truck using an auto loan.
This auto loan is a liability. The automobile purchase is also a liability as it requires gas, maintenance, and insurance. A liability is something that takes money out of your bank account on a recurring basis. Using liabilities to pay for liabilities comes from a scarcity mindset. The dollars we have worked so hard for are going to be worthless in the future (due to inflation). So, we spend them now and borrow from our future selves in order to get the most value we can today. This mindset is keeping many Americans from realizing financial freedom. Instead of using liabilities to pay for other liabilities, individuals should use their earned income to buy assets. Assets are the opposite of a liability because they put cash into your account and provide income on a reoccurring basis. Sound financial principles would dictate that an individual takes the income they receive from work (earned income) and buy assets. Once you have enough assets to pay for an expense or liability then you can make the purchase as the asset should continue to produce income paying for the new liability incurred. That way you don’t have to keep going to work to pay for the things that you need in life.
Let’s look at the diagram below:
Income (on the top left) should only be used to purchase assets (on the top right). Once you own assets you can use them to purchase other assets, expenses, and or liabilities. Earned income (the income you work for) should not be used to pay for expenses or liabilities directly. The only thing earned income should be used for is buying assets. By taking the step to purchase assets that provide income first, you can use the income generated to pay for both assets and liabilities. It is important to understand that you should always have more assets than liabilities, otherwise some of your earned income is paying for liabilities and expenses. Never use liabilities to buy more liabilities and never use a liability to pay for expenses. By following the correct order you can continually generate wealth. So what are some examples of assets? Bonds (interest payment for loaning cash), stocks that pay dividends, selling options contracts, tax liens, royalties, rental property, mining cryptocurrency, lending cryptocurrency, and staking cryptocurrency assets to name a few. A great place to get started investing in cryptocurrency is Crypto.com. Join 10m+ users buying and selling 90 cryptocurrencies at true cost, spend with the Crypto.com Visa Card and get up to 8% back while also growing your portfolio by earning up to 14% interest on your Crypto Assets. (Sign Up Link for Crypto.com)
The aforementioned assets can pay for expenses like luxury goods, vacations, or liabilities like an automobile, boat, or a primary residence.
So, the next time you are thinking about purchasing some type of expense or liability ask yourself if you have an asset that will pay for this item or liability before making the purchase. If the answer is no then you should consider buying an asset instead. Have you ever tried to get a loan to buy assets? It can be really tough, most of the time the loans are more expensive if you can even get one at all. If you went to a bank and asked to take out a loan to buy stock in that same bank they would turn you away empty-handed. Banks will provide a loan on the rental property however, there is risk in this as the rental property must cover all the expenses and the liabilities created from the purchase of the property. Typically the rental property needs to exceed the costs of ownership because the loan payments are more consistent than the occupancy of the rental property. So although investing in rental property can build tremendous wealth over time, keep in mind that you may be inadvertently taking on liability at the same time you think you are buying an asset.
Disclaimer: I am not a registered investment, legal, tax, or financial advisor. All investment /financial opinions expressed in this post are from the personal research and experience of the owner of this account and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with or independently research and verify the information that you find in this post to rely upon, whether for the purpose of making investment decisions or otherwise.
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