Buy Assets Like the Rich

An asset is anything you own that puts money in your pocket, while a liability is anything that takes money out of your pocket. The rich buy assets, while the rest of us only buy liabilities. The most dangerous of these are liabilities that we think are assets.

I was struck the other day when a friend of mine purchased a brand new Audi sports car, complete with all leather interior and two sunroofs. She owns a dog walking service and probably earns about $80,000 a year, and, like most others of our generation, sees little to no value in saving for the future. She plans to quit working in a few years, have a baby, and raise a family. However, she's doing the opposite of preparing for that.

She put $500 down on a car that cost her future earnings of about $26,000. She got a very low dealer interest rate that puts her monthly payment at $440. She has a terrible driving record and her insurance is sky high, considering she lives in a city and needs to have full coverage because the dealership has a lien on the title of the car, about $400 a month. The first week she had the car a "client" (I think it was a Doberman) chewed off her drivers side mirror. The next week she left both the sunroofs open overnight during what turned into a very rainy evening. Finally, within her first month of possession, a truck backed into her at a stop light, damaging the entire passenger side of the car.

While her car is being repaired she is still making payments. She is out money for the cost of deductibles, and the rain has likely done extensive damage to the electrical systems. The real irony in this situation is that her husband described the car to me as an asset. Does that sound like an asset you would buy (invest in)? When does that asset start putting cash in your pocket?

I understand that most of us need a car or truck to take us to and from our jobs and errands, and that we cannot always find a reliable vehicle that we can pay cash for. It is important to plan appropriately for these major purchases and to have the savings available when the time arrives. It is also important to purchase an appropriate vehicle. For example, if you have a very long commute, or have to drive a lot for your work, then consider your comfort level and gas mileage. If you need to wear a suit to work each day, you probably need air conditioning, and if your job involves taking dogs in your vehicle many times a day, you probably don't want a sports car; a small van may be much more adequate. My friend's new Audi is both inappropriate for its use and too expensive for her. But her fundamental problem is not the Audi - that is merely the most recent manifestation of her problem. Her true issue is with her thinking. She needs to understand that a car is not an asset, and further, what an asset is and what a liability is. A car is, at best, an expense when you have no lien/debt attached to it. My cars are an expense (no debt, but there is still insurance, maintenance, and repair). But, at worst, they are an expense and also a liability.

Several years ago my grandfather died. He fought in WWII, came home from the Pacific, and worked in the shipyards as a welder. He also raised 9 children, only 4 of which were his own. After he retired from the shipyards, he bought a very small house near the ocean and worked as a security guard. He worked until he was too sick to work, and died after only truly being retired for about a month. He left half of his life savings to his wife, and the other half to be divided among his four biological children.

My aunt used her inheritance to purchase new cars for her and her husband, take a trip to Greece, and make several improvements to her house. Now the money is gone and she is still working as a bank teller with little savings, just like she has for over 30 years. The only difference is she now has two new cars to maintain. She thinks she will get the money "invested" on home improvements out of the house when she sells. My mother, on the other hand, used all of her inheritance to purchase a conservative allocation of low cost mutual funds and certificates of deposits, and has the dividends distributed to her each quarter. The value of her investments has grown in the past few years, and so has the size of her dividends. My mother now owns my grandfather's beach house, and uses the dividends to pay the costs of maintaining it. As a result, she can enjoy the house all summer long. Who purchased an asset and who purchased liabilities and expenses?

The achievement of wealth usually requires methodical asset accumulation. It is easier to accumulate assets when you aren't spending your time accumulating liabilities and sacrificing future earnings. When you sacrifice future earnings, you sacrifice unforeseen opportunity, and when you sacrifice unforeseen opportunity, you sacrifice your ability to accumulate assets in the future, all for two sunroofs and leather interior!