The title makes you wonder is this a sequel of this age-old book that you are writing a review about? Makes you think dude this book is over 20 years old – what learnings do you want to share now? Yes, I agree the book is age old - but to be honest I just read it 2 months back. And there were some aspects I really liked about it. So here I am sharing some insights with you. But hey, like you would always come across in this world, a piece of disclaimer before we hop onto it. This blog is not meant to capture the facts discussed in the book - so if I tweak them slightly because I learnt something else from it, please don’t hold me for it. Also, your learnings may differ from mine. Happy to hear from you in the comments section in case you have anything to add.
Ever came across a question from your geeky friend as to whether your house is an asset or liability? That was exactly the time when I first heard about this book, which also corresponded with my first year of learning accountancy. People who know accountancy or even very basics of it would rubbish away the question saying dude check your basics, it is obviously an asset, where is the question or a debate around it? Exactly what I did around 10 years ago and held that notion in my head until I actually read this book. People who have not yet read the book will say wait what? you are saying we have been learning inaccurate accountancy since years? You mean to say all the financials are fudged? Relax guys, not what I am talking about, I am not questioning the accountancy, nor have I started posting house in the liability side of my balance sheet. So, what am I talking about? For that I want all of you to pause here for a moment and think what exactly is an asset and what exactly is a liability? I am not looking for examples here but your thoughts on the meaning of it.
Put simply, an asset is anything that generates income and a liability is anything that generates expense. Some may agree to this definition, some may add to this definition, some may thrash it away. But to me, this definition really struck me. Think of it? What value does your house give you (assuming you live in that house)? (Answers only in financial terms here, without considering the emotional values attached to it) An opportunity cost of saved rent for a house that you would have had to take on rent. Now tell me what expenses does that house require? Property maintenance expenses, interest (if you take it backed by a loan) and opportunity cost of income you could have earned from your investments had you invested it elsewhere (if backed by your own funds). Lets carry out a broad math around it?
Here where I live, a property of approx. INR 1 crore fetches a rent of approx. INR 2.5 lakhs per annum so that’s the value you get if you own a house of your own, you save INR 2.5 lakhs. Now what all expenses do you incur, say property maintenance charges of INR 12,000 and opportunity cost of those INR 1 crore invested elsewhere? Say you invest in stocks or mutual funds you would be easily able to fetch around INR 10 lakhs per annum with quite reasonable estimates. Almost 4x is what your income stream is if you take a house on rent instead of buying it. So you decide whether your house is your asset or a liability? You may probably attribute a higher value to the trauma of having to shift your house in case your landlord asks you to vacate it, the stamp duty expenses, rent escalation, brokerage? See the idea is not whether the above figures are mathematically accurate in each circumstance and for each one of us. The idea is your short term dream may be a hinderance in building your future. Buying a car on your own at 25, traveling the world in your 20s, buying a house on your own at say 30 or 35 may seem like wow. Buying a fixed deposit, shares or mutual funds or any other form of investment doesn’t look that cool. So is your house always a liability? Is your car always a liability? Not really. In fact the author of this book Robert Kiyosaki has made substantial wealth by flipping houses. Some people make wealth by giving cars on rent. So any object is not by itself an asset or liability. But depending upon what you are going to use for, you may want to think in accordance with the meaning provided above.
The second thing I really liked in this book is the concept of passive income and why is it important? In case you are / were in your early or mid 20s with a decent job and good enough thrift to save and invest part of your income, ever heard your investment advisor asking you the investment horizon that you are looking to invest for? You may say you are investing to buy a house or for your marriage expenses or so on. But you may feel why and for what do I invest in addition to my wants. Even I came across these questions, thinking its ok to spend in addition to what I save for my wants (not that I had stopped investing the extra money I could save). But the concept of passive income really got me the answer of why to save. You may have heard of quotes like “If you don't find a way to make money while you sleep, you will work until you die.” Or say “Power of compounding as the 8th wonder of the world”. So what really is passive income. To put simply, any income that your earn without your time involvement. Be it income from investments, income from business that you started, rental income from house or any assets, royalties or any other income that doesn’t require your time involvement. The more passive income you create, the more you have money or other people working for you and the lesser you are mandated to do. Now one may think what is the power of passive income? (a) You cannot / may not want to work until you die, so the more passive income you create, the lesser you may be required to mandatorily work to pay your bills (b) You may want to start your own venture but maybe hesitant because you may be the sole / important earning member of your family. So this is what can keep you relaxed without stressing to pay for your bills and killing the plans to start your venture. Creating a passive income is like having a new family member who can earn so that you can allow yourself to focus on your venture either partially / totally depending upon the passive income you earn and your needs. So it basically allows you the time and peace of mind when you are trying to create your own venture or anything else that you may want.
Whilst I have mentioned two of my favourite ones, you may have many other things that you may have liked in the book. So did I. But these two were the ones that really changed my outlook on investing. So I will keep my blog restricted to these. So to summarise, keep in mind (i) what are your assets (anything that generate you income) so focus on creating more and valuable assets and (ii) creating more and more passive income. As I mentioned in the beginning of this blog your learnings from the book or on these topics may differ from mine and I would be happy to hear from you in the comments section in case you have anything to add. So until next time, here I am, Signing off !!!
CAclubindia
