Robert Kiyosaki has not accepted the conventional accountants’ definition of an ‘Asset’. The conventional definition of an ‘asset’ is, 'any item of economic value that can be converted into cash’. Examples of such assets are land, buildings, stock and receivables and so on.
Robert’s definition of an asset is, ‘anything that puts money in your pocket or kitty’ and his definition of a liability is, 'anything that take money away from your pocket or kitty.' My question is, “Can we be smart to follow the new definition of ‘Asset’ in our Personal Finance?”
There is a distinct advantage of following Robert’s definition since it emphasises on the cash flow, which is vital. The major implication of this is that many a time we invest in liabilities thinking we are investing in an asset. The most common example Robert cites is the ‘investment in a car’ or 'investment in self-occupied house'. Let us discuss this in detail:
- Needless to add that car takes money from your pocket in the form of fuel, insurance, taxes and maintenance and hence it is a liability.
- A self-occupied house takes away money in the form of maintenance, insurance, taxes etc.
- Now the question arises, when a car and a house can be considered an asset? A car, when used for generating business for you is certainly an asset. Similarly a house let out on rent is an asset.
I don’t want to spend too much time on definition as much as the principle behind in making decisions that can make a person rich or mediocre. I see a lot of sense in Robert’s definition since it gives you a perspective of what you can do. Don’t bother whether his definition will pass the test of Accountants or not.
As far as I am concerned, your decision making will be biased towards regular cash flow and that will make you rich! In the short run, if you just correct yourself in avoiding investment in liabilities such as mobile phones, expensive TV’s etc. and invest in assets such as mutual funds, shares, you have made a good beginning. Do you have any objections?
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