When we talk about assets and liabilities for financial freedom, we are not thinking of the accounting assets and liabilities. We are not trying to balance our asset to liability column, that would be considered living paycheck to paycheck. With assets and liabilities in life, we want more assets than liabilities. Assets bring us in money, liabilities take money away from us. So, we want to have more assets than liabilities.
One thing to think of when you are making a purchase is, does this make me money or cost me money? For example, you want a brand new car because you “earned it” because you have worked so hard. That car costs you $30,000 to buy and you pay monthly payments on it of $500 a month. This would be a liability that is costing you every month. Or you could keep your current car, use your saved money for a down payment on a rental property and make $300 a month in cash flow. That would be a difference of $800 a month, just by choosing an asset over a liability.
So, if you want to be financially free, load up your asset column and reduce your liability column. Once your cash flowing assets are more than all of your liabilities, you will be considered financially free. Essentially, you will not have to work to pay for your lifestyle because you have passive income from cash flowing assets that pay your lifestyle.
Some examples of cash flowing assets are:
- Rental properties (single family, multi-family, commercial, Airbnb, vacation rentals)
- Land that you rent out
- High interest savings accounts
- Dividend paying stocks
- REITs – Real Estate Investment Trusts
- Businesses in any fashion (as long as it cash flows, has systems in place, and you do not have to work to make money)
This is a list of some cash flowing assets I can think of. There are more, but here is a broad overview of what we are talking about. Your goal is to beef up this category as much as you can.
Some examples of liabilities are:
- Car payments
- Mortgages or rent
- Food, water, shelter
- Spending money to have fun
- Memberships such as Netflix, phone, etc
Here is a quick list of what most people have. There is an endless amount of liabilities a person can have. Think of anything you have bought recently, it was most likely a liability.
Assets – Liabilities = Net Worth
If we take our total assets less our total liabilities, we get our net worth. Our net worth is our guide for our financial health. We believe it is important to write this stuff down and see what your net worth is and how financially stable you are. We like to take it a step farther than that and fill out our quarterly financials. Everyone has a financial sheet for their personal life, they have their profit and loss statement and their balance sheet statement. These two statements will show you your assets, your liabilities, your net worth, and how you are doing financially compared to a quarter before, a year before, or compared to someone you are striving to be. We like filling out our P&L and balance sheet to see how profitable we are and how much our net worth is going up. This helps us stay in check to make sure we are always progressing. Nothing would be worse than looking at a financial statement, one year compared to the next and seeing you have more liabilities than the year prior with less income.
By filling out your financial statements quarterly or bi-annually, you can stay on task with your bigger goal of being financially free. Wouldn’t it be nice to never have to work again? Your lifestyle is 100% paid for and all you have to do is collect paychecks. Could you imagine not needing a paycheck? You could go to work because you want to work not because you need to work. You could not work all together and enjoy the fruits of your labor or you could have a part-time job that aligns with one of your hobbies. Maybe you will keep working and grinding to increase your asset column, allowing you to buy more liabilities that bring you joy. Whatever the route you decide is right for you, filling out your financial statements to make sure you are acquiring more cash flowing assets than liabilities will help you tremendously in the future.
Your life Tutor