One of the most important keys to success is financial literacy.
It is nothing but knowing the difference between Assets and Liabilities.
The simple definition for them is:
Assets: Assets are anything that makes money for you.
Liabilities: Liabilities are the things that take money away from you.
The reason why rich people are rich is that they acquire assets.
While the middle class just buy liabilities.
For example, there were two friends Bob and Bill. Both were working on the same post with the same salary.
As soon as they got the salary, Bob used to spend all his money on buying the latest mobile phone, cool gadgets, branded clothes, bike, or anything that will make him feel good and rich.
But, he failed to think that all those were liabilities.
As they took money away from him, not just for buying it, but also for maintaining it.
Those things kept reducing the value as the time passed and did not return him any profit.
But, Bill did not buy any of those things until and unless it was necessary.
He used to save the money and spend it on assets like stocks, bonds, real-estate or developing his own skills, etc…
Which could generate him the income in the future and make money.
After the span of 2 years, Bill became a billionaire while Bob kept on struggling financially and blamed his low salary as the reason for his struggle.
The Cash Flow of people goes something like this:
For poor people, they get income and then they have expenses which eat away all their income.
For the middle-class, the income goes into expenditure and liabilities which they think are assets. For example, for most of the middle-class people, the house they own is their asset. But that is not true as the house does not put money in their pockets or make money for them. It is just a liability unless they give it for rent.
The rich class, on the other hand, spends their income to make assets which in turn make money from them and then they mostly spend expenditures from that income.
So by doing this they continuously grow and keep getting rich as their sources of income increases.
If you really want to get rich, then let this simple idea fit into your mind.
It’s not the amount you earn, but the amount you keep…
You have to shift from a consumer mentality to an investor mentality.
People keep complaining that they should get better income which would improve their life.
But the problem is even if their income increases their expenditure increases as well.
As high income will make them desire to have a better house, a better car, etc… which again are liabilities that will keep them away from getting rich and struggle financially.
As a conclusion, its not how much money you earn, but how much you spend will make all the difference.
These concepts were taken from the book Rich Dad, Poor Dad.
It changed my perspectives on life. I think you should definitely read it once.