Secret to Building Wealth - Buy Assets, Avoid Liabilities (2023)


This the secret to building wealth – Buy Assets and Avoid Liabilities. The first time this became clear to me was when I readRich Dad Poor Dadby Robert Kiyosaki. The book is an easy read, but it has many flaws*. If you haven’t read it yet, I encourage you to check it out from the library and give it a quick read. However, you need to take the book with a grain of salt and don’t blindly follow it 100%. You’ll have to separate the good advice from the bad. The biggest takeaway I got from Rich Dad Poor Dad is how to differentiate between assets and liabilities. It turns out, I had it wrong for years. Once I learned that lesson, building wealth became much smoother. It makes a lot more sense to accumulate assets and avoid liabilities.

Secret to Building Wealth - Buy Assets, Avoid Liabilities (1)

* There are many problems with Rich Dad Poor Dad. Mr. Kiyosaki is a great motivational speaker and salesman. That’s how he made his fortune. His books are designed to sell more books, courses, and seminars. Don’t fall for the seminars! They are expensive and not very useful. You can learn a lot more for free on the internet and the library. I recommend reading The Millionaire Next Door and Your Money Or Your Life before Rich Dad.

Assets and Liabilities

Like most people, I used to think assets mean anything that has a cash value. However, that’s not the right way to look at it. If you want to become wealthy, you need to think of your household finance as a business. An asset is something that, in the future, can generate cash flow for you. Assets make money. Anything that takes money out of your pocket is a liability.

This was a revelation to me. I used to include our home, car, piano, and other personal belonging in the asset column. That’s the wrong way to look at it. All these things are liabilities. It changes how I think about spending. In my 20s, I felt great when I purchased our BMW convertible because I thought it was an asset. Now I know it’s a liability. That’s why I’ll never buy another luxury car as long as I’m building wealth. Once you think about assets and liabilities this way, it is much easier to build passive income.

Let’s take a look at some “assets.”


I’m sure you’ve heard that your home is your biggest asset. Is this really true? When you buy a house, you’ll have to pay the mortgage, property tax, HOA, insurance, utilities, repair and maintenance, yard work, and furnish it. That’s a lot of $$$ going out of your pocket every month. Sure, the house can appreciate, but would the appreciation be enough to surpass all the expenses? That’s not always true. We purchased our 2 bedroom condo in 2007 and sold it 12 years later. The sale price was was just $1,000 over what we paid in 2007. Add all the other expenses up and we lost a ton of money from living in that condo. We came out a bit ahead compared to renting, but not by much. Anyway, we all need a place to live and a house is great, but it isn’t really an asset.

A house is good because it forces people to save. A portion of the mortgage payment goes to the principal and you’ll get that back when you sell. We collected $140,000 after we sold our condo. It’s nice to have a lump sum in the bank. Most people use this as a downpayment for the next home, but we didn’t need it because we moved into our rental duplex. I’ll invest the $140,000 in CrowdStreet and dividend stock.

There is one way to generate some money from your house – rent out the extra rooms! We used to rent out the extra room at our old home to new engineers. This worked out great. They were never home and the rent helped pay our mortgage. Renting out an extra room is even more lucrative today with Airbnb. Lots of people are making extra money with it. This really depends on your personal situation, though. Most people value their privacy too much to rent out the extra room.

*Update* We moved into our rental duplex. We live in one unit and rent the other one out. It’s been great so far. Our housing expense dropped significantly. This is a really good house hack.


For many people, their car is the second most valuable thing they own (next to the house). A car is a necessity to most people and it costs a lot of money. However, it’s not an asset. It’s even worse than your house because a car depreciates every day and you also need to buy gas. A car is basically a money pit. How much money do you spend on your car every month? Can you imagine investing that money instead? Most of us need a car to go to work and run errands. It’s an unavoidable expense almost everybody. However, I don’t think anyone should buy a luxury car unless they are already wealthy. I’ll buy another convertible someday, but it can wait until I’m rich.

Everything else you own

Pretty much everything you own is depreciating. Furniture, TV, laptop, cellphone, tablet, kitchenware, clothes, and everything around you are losing value as you read this. It’s a funny way to look at your possessions. I can see dollars signs floating away from everything I own. Does this give you pause before you buy the next gadget on sale this coming Black Friday? Maybe it’d be better to just kick back and take it easy at home instead.

Let’s look at it another way

  1. Good assets– Income producing assets such as stocks, rental properties, real estate crowdfunding projects, bonds, and a business.
  2. Neutralassets – Appreciating assets such as your home, gold, artwork, antiques, and collectibles. I think these are neutral because you never know if the appreciation will beat inflation and the cost of upkeep.
  3. Liabilities– Depreciating assets like your TV, furniture, and other personal properties. These things are just sitting around leaking money.
  4. Worse Liabilities– Income consuming assets like your boat, car, and cell phone. These things need a monthly cash infusion to stay functional.

Of course, most of us need our car and cell phone to function in the 21st century. It’s okay to have more liabilities than good assets when you’re starting out. That’s normal, but you need to accumulate good assets to become wealthy.

Where are you on this wealth scale?

This is a wealth scale I invented. It’s a bit different than how we normally think about wealth. We usually think wealthy people live in a big house, drive a luxury car, and belong to an exclusive country club. However, are you really wealthy if you spend all your income every month? Wealth isn’t how much you spend; it is how much you keep.

  • Novice/Poor – You’re poor if you have a lot of liabilities and need to keep working to maintain your lifestyle. People can be poor even if they have great income. Unfortunately, most Americans are stuck here most of their lives.
  • Amateur – You have been investing for a while and own some good assets. If the value of your good assets is more than 50% of your net worth, then you’re firmly in this class.
  • Financial Independence– This should be the goal for everyone. Once the income from good assets, aka passive income, surpasses your expense, you can retire and live life the way you want.
  • Generational Wealth – This is beyond financial independence. You have plenty of income from your investment to keep reinvesting. This way your wealth will keep growing and you can pass it on to the kids. That’s generational wealth.

Most of us start off poor and the progression to the next level is not easy. The American consumerist culture encourages everyone to spend money on things they don’t really need. Almost all of us fell into that trap at some point. I purchased a lot of money-draining liabilities when I was young too. Luckily, I started accumulating good assets early as well. Once I learned the difference between assets and liabilities, I kicked it into high gear and really focused on passive income. It took over 20 years, but our passive income finally surpassed our living expense! It’s a great feeling.

What about you? Where are you on this scale and where will you be in 10 years? Are you accumulating assets or liabilities?

DIY investors

If you need a better way to manage your finance, signup with Personal Capital. We have many accounts and Personal Capital helps us see the big picture. Also, I’m a huge fan of their awesome retirement calculator. You can read my review here – The Best Free Retirement Calculator. I highly recommend Personal Capital.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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