"Never put your money in anything that eats or needs repainting." Billy Rose
In "standard accounting," if you buy a house, it's considered an asset. As Robert T. Kiyosaki indicates in Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That the Poor & Middle Class Don't, "Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets... people do not know the difference between an asset and a liability... assets put money in your pocket... A liability is something that takes money out of my pocket."
From a cash-in-your-pocket perspective -- which is all important -- if you put $1,000 into money-making program X, initially you've incurred a liability -- $1,000 out of your pocket. As soon as program X starts putting money back into your pocket, it starts shifting toward becoming an asset. After it has put $500 back into your pocket, on balance it's still a $500 liability. That's why the "can't-lose" position (see Money Skill #24) is so important. This is the point where you've recovered your $1,000 completely. Now program X has become an asset if it continues to put more money into your pocket.
When you buy a house and you have to make $1,000 mortgage payments every month, you've bought a liability that takes $1,000 out of your pocket every month. On top of that, you may have to pay a further $100 or more per month in property taxes. As Kiyosaki indicates:
"As an employee who is also a homeowner, your working efforts are generally as follows: 1. You work for someone else. Most people, working for a paycheck, are making the owner, or the shareholder richer. Your efforts and success will help provide for the owner's success and retirement. 2. You work for the government. The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government -- most people work from January to May just for the government. 3. You work for the bank. After taxes, your next largest expense is usually your mortgage and credit-card debt. ...You need to learn how to have your increased efforts benefit you and your family directly."
This is a good point at which to briefly analyze aspects of World Network Holdings -- see The Harry Plott Saga Part-I. In 1996 WNH started getting into serious cash-flow trouble and couldn't meet all its obligations. Although Harry Plott is an astute businessman, in my opinion, his problems were partially due to not sufficiently understanding and appreciating the difference between an asset and a liability. WNH was originally a cooperative membership organization paying members 3% per month on loans made to WNH. In addition, WNH paid a referral fee of 1.5% per month to those who recruited other members. Terra Libra earned phenomenal returns, largely because we recruited about 900 people. Harry invested the money received from WNH members in a wide range of businesses.
Early in WNH's life I asked Harry, "Are the businesses you're investing in returning more than 4.5% per month on the money you're putting into them?" Obviously, for WNH to be a viable company, it had to earn more than 4.5% per month on its money in order to pay its members 3% interest plus 1.5% referral fees. Harry replied, "Yes." I have no reason to doubt that at that time this was true.
Altogether, I believe that Harry collected about $20,000,000 from members. I also believe that at a certain point Harry ran out of businesses to invest in that returned more than 4.5% per month in cash. So he started investing in start-up businesses that required monthly cash to stay in business but had the potential for large long-term cash returns.
The first thing to realize is that as soon as a member stopped putting money into WNH, he or she became a liability who effectively had to be paid 4.5% interest every month. At a certain point, Harry closed WNH to new members. At that point, I believe, WNH had about 9,000 members all of whom were (from a cash-flow perspective) liabilities because they had to be paid, taking money out of WNH's pocket. Some members also withdrew their original capital, further straining WNH's cash flow. Some members had to wait for repayments and complained to government agencies. Harry had to spend a lot of time warding off attacks and keep going. It says a great deal for Harry's resilience that he didn't give up and run.
At one point, Harry calculated total WNH assets at about $40,000,000. I have no doubt that in terms of "standard accounting" this figure was accurate. However, from a cash-flow perspective, Harry couldn't have been more mistaken. WNH's "assets" included what I believed was the largest ostrich farm in the world. Mortgage payments had to be made. Birds had to be fed. Farm workers had to be paid. When NAFTA made it virtually impossible to compete with ostrich farms in Mexico, WNH's ostrich business went "south." The farm was eventually lost to foreclosure. The "asset" (which had probably been a substantial liability in terms of cash flow for most of its life as part of WNH) was wiped out.
Meanwhile, there were all the new businesses that required cash inflow every month to keep going. From a cash-flow perspective, they were all liabilities. And the businesses that were really assets, making money for WNH every month, had to be drained of cash to pay all the liabilities. This must have greatly reduced their ability to expand. Most of the negative-cash-flow businesses eventually had to be abandoned.
Had Harry sufficiently understood and appreciated the difference between an asset and a liability from a cash-flow perspective, he would never have structured WNH the way he did. He wouldn't have gotten into the trouble that he did. He wouldn't have saddled himself with about 9,000 "liability-members." He wouldn't have put any money into businesses that couldn't very quickly return more than 4.5% per month.
Nevertheless, it speaks volumes to Harry's determination, perseverance, and integrity that he didn't run away when the difficulties became so great that they would have overwhelmed 999,999 out of every 1,000,000 businessmen. I believe that there's a fair chance that the erstwhile WNH members will get most or all of their money back within the next 2 - 3 years. Some of the core businesses started by WNH are moving ahead strongly. See Harry Plott Saga - Part V.
Personally, in the past I've also run into problems because I didn't understand and appreciate the difference between an asset and a liability. Now I'm very hesitant to organize or run any business in a way that involves me paying out money to members, making them liabilities from a cash-flow perspective. I prefer to have associates and contacts put money into highly profitable programs, enabling them to make money and earning me referral fees. That way they are assets to me, and indirectly I'm an asset to them if they're successful in making money from the programs I recommend -- see Risk Meter.
I develop my assets by playing a role in my associates and contacts increasing their wealth, earning me more referral fees. I develop my assets by increasing the number of my associates and contacts. I also develop my assets by increasing the number of profitable programs I'm involved with and playing a role in making these programs more profitable. Hopefully, the money skills explained here will be assets to my readers in that they will use them to put more cash into their pockets.
