So today is my day off and I plan to stay home, which means today is a no-spend day! Yay!! Anyway, I usually try to study about real estates or personal finance everyday for at least 10mins, and about 2-3 hours on my days off if I have time.
But let's get to the point of today's entry.
I was listening to Robert Kiyosaki's audio tape series on YOU CAN CHOOSE TO BE RICH, and I came across an interesting distinction between good vs. bad assets.
According to Robert (and his Rich Dad), a bad asset is when an asset fails to generate a positive cash flow. That is, if I buy a boat for personal use, the boat becomes a bad asset since it doesn't generate income for me.
However, if I use the same boat for commerical purposes like holding my own boat tours and charging customers, then that same boat becomes a good asset.
Robert then goes to name the bad assets 'do assets' (or could be 'due assets' - I'm not sure from the audio chapter).
Hence my questions of the day:
1. Are there such things as Do/Due Assets? If so, what are they exactly, and are they determined solely by positive cash flow? How would a banker versus an investor view this?
2. With Debts, we know the diffrence between good vs. bad debts. A good debt is one that builds your equity over time, and a bad debt is one that diminishes your overall net worth. Having a car loan is generally considered as a bad debt while having a mortgage is generally considered as a good debt.
(Note here that I used 'generally' since a mortgage can also become a bad debt if it results in poor rate of returns on equity and produces a negative cash flow. In that case, one is probably better off selling THAT property and closing the mortgage (bad debt) all together so re-investments can be made elsewhere.
Can assets be broken down into good vs. bad assets the same way as debts (good debts and bad debts?
3. Does this mean that I can make two different networth statements based on the two definitions of assets? Would those then yield different insights? What would an accountant say? What would you do?
I think Robert has a point when he talked about his 'do debts'. I mean, it make sense for a banker to count all of your personal properties as assets. For example, the boat and the car. You can sell them for money, though, in a depreciating way rather than an appreciating way (ie. house). The boat and the car are still assets since you can still get money out of them.
But to Robert, they are 'do debts' since they do not generat passive income for the owner and should be left out of the assets column of the overall net worth if one desires a clear financial picture.
I think I should draft up two net worth statements. hahaha.
Anyway, any thoughts?
Help! Definition of Assets and Debts
November 3rd, 2006 at 01:07 am
November 3rd, 2006 at 01:29 am 1162517343
Now, this is just my opinion, but in the end, I do not believe there is a good or bad. There is simply a number. That number is the net worth of each individual item. For example, a boat's net worth is how much you paid for it when you bought it versus how much you can sell it now or how much you still owe on it. Of course, because it's a depreciating item, the (negative) net worth of the boat will continue to drop.
Even a house can be looked at it that way (and is often times done so). In short, that's how your home equity is determined. Fortunately, real estate generally has the potential to grow.
In the end, one hopes to be wise enough to acquire items in their lives that proves to be more on the positive net worth than not. In that sense... very few things are truly assets in my opinion.
However, I would also prefer not to get too hung up on the definitions of "assets" and "liabilities", and especially the concept of "good" and "bad". I would also personally prefer not to calculate too many variations on net worth. In the end, they will all cost you money somehow, only you hope that you can make wise enough decision to stick with things that will give back rather than take away.
However, this neglects the "emotional" value of items, which would complicate things even further.
Well, that's my crazy thought for the night.
November 3rd, 2006 at 05:40 am 1162532435
November 5th, 2006 at 07:42 pm 1162755728
(oops, not sure if this answers your questions!)
November 6th, 2006 at 04:38 pm 1162831097