Remember the definition of an asset from Lesson Three? In simple terms it’s a thing of value. Time is an asset. Money is an asset. How about your talents? Sure. The tools of your trade? Absolutely. Even your good looks and sense of humor can be assets.

So what’s a liability? In the most general terms, it’s anything that works to your disadvantage. Something that lacks value or causes the devaluation of an asset. Unpaid bills are a liability. A car that breaks down once a month is a liability. Procrastination is a liability.

As you can see, assets and liabilities do not always relate to money or monetary issues. Now let’s put our thinking caps on and have some fun.

You tell me if it’s an asset or liability …

A $50 Federal Reserve Note (cash)

If you said asset, you’re correct.

If you said liability, you’re also correct.

It’s an asset because it can be exchanged for something of value. Like a steak dinner for two at a decent restaurant. It’s also a liability because it’s accepted value drops day by day through things like inflation. And inflation is about to shoot through the roof.

A year from now that 50 bucks might get you only one steak dinner at a decent restaurant. Possibly two years from now you’ll be lucky to get a Quarter Pounder with Cheese. I’m not kidding.

A $50 Gold Eagle coin

If you said asset, you’re correct.

Not only is it a thing of value it’s a thing of increasing value and utility. Whole groups of people are now using gold and silver as a medium of exchange just like the world did for many thousands of years. With gold and silver you always know what your money is worth.

A Brand New $40,000 Car

If you said asset, you’re correct.

If you said liability, you’re also correct.

It’s an asset because it gets you around in some degree of style, comfort and safety. Now, would a good used car at $20,000 do the same thing for you? Then unless you’ve got $20,000 to blow, the more expensive car is a liability. And unless you’re already fabulously wealthy, you really don’t have $20,000 to blow.

And have you considered something called depreciation? It simply means a decrease in value over time. And new automobiles are notorious for being worth far less the moment you register them at the local DMV. That’s the point at which a new car becomes a used car. That $40,000 car could be worth only $30,000 in a flash.

Now that $20,000 used car may have started off as a $40,000 new car. It’s just three years old now and the original owner took the big depreciation hit. You can probably keep this car for five years and give up that same $10,000 in depreciation. In fact you may not give up any at all. Amazingly, five years from now that car might still be worth $20,000. How is this possible?

As I write this, new car sales are off a whopping 40%. No one’s buying them. That means used cars, with their lower price tags, have more appeal right now. And so their values have held steady and in some cases have even increased. But the rule of thumb has always been: never put your money into a depreciating asset and almost all cars are depreciating assets.

A single family home in a nice neighborhood

If you said asset, you’re correct.

If you said liability, you’re also correct.

Surprised? Let’s take a closer look.

Compared to your average automobile, the single family home is a better bet depreciation-wise. Historically, homes appreciate in value and before the so-called real estate bubble burst, many neighborhoods saw some pretty wild appreciation.

But it really wasn’t a normal appreciation. The quick rise was caused by a stampede of new buyers, who unfortunately, never should have qualified for mortgages in the first place. I’m taking about the sub-prime market.

The Fed made lots of cheap money available (one cause of inflation) to banks and banks in turn saw an opportunity to make money. To make quick profits they qualified people with poor credit, no credit and in some cases, no income (or at least no verifiable income). With all these people rushing out to buy homes, prices skyrocketed.

Now that the bubble has burst, prices are settling back down. Of course in areas hard hit by the recession, prices have pretty much crashed. You can buy homes in Detroit for less than 100 bucks, but you probably wouldn’t want to.

The bottom line is that there is a normal expectation of appreciation in just about any single family home in any single family neighborhood. So why would a single family home be a liability? Because in most cases it can’t make you money.

And that’s the one aspect of a true asset most folks overlook. If it’s not making you money then it most certainly is costing you money. Then in fact, it’s a liability. See, for the investor, there’s no such thing as breaking even. That’s because time is money. And if your investment isn’t earning you money, it’s losing you money. You could stuff your money under a mattress and achieve the same goal with far less risk.

Are there exceptions? Yes. I hold a number of single family homes for investment purposes. The difference for me is that I went into these deals with investment in mind (as opposed to having a roof over me head) as the goal.

I bought homes most likely to appreciate in value, in neighborhoods most likely to appreciate in value, with little of my own money and on top of all that, I rent them out to cover my carrying costs. And because they’re investments (and not a roof over my head) I can take advantage of numerous tax benefits available to real estate investors.

A Multi-Family Home In A Nice Neighborhood

If you said asset, you’re correct.

You have the advantage of multiple incomes and all the tax advantages of investment property to boot.

Now let’s move from hard assets to income streams. This will almost be a repeat of our lesson from Day Three – Leveraging Your Assets. I’m betting you already know the answers.

A weekly paycheck is a liability. Limited income (limited by the time you can work) and no potential to have money or time earn you more money.

Owning a traditional business is a liability. The potential exists for other people’s time and skills to make you more money, but with far too many headaches.

Network marketing is an asset. You can definitely leverage other people’s time and skills to earn you more money and you have few headaches (if you do it the way I do it) and you have near zero liabilities.

Internet marketing is an asset for pretty much the same reasons network marketing is an asset.

So if you’ve ever wondered why I invest in gold and silver, real estate and a network marketing, now you know. All three are proven assets because they can earn you money beyond what you could make on your own with the time available to you. And if your mom or dad ever told you never to put all your eggs in one basket, you know why three investment vehicles are far better than one, or even two. And yes, I’m deeply involved in Internet marketing because four streams of income are better than three.

Tomorrow’s message should interest you. We’ll talk about saving and investing your money (building assets). See you then!

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To YOUR Success,

Business & Marketing Mentor
Phone: 805-874-2410