Review your personal balance sheet

Reproduced with permission from the Bad Entrepreneur blog.

I'm definately not one of those Robert Kiyosaki "Rich Dad, Poor Dad" preachers - but I think there was one really simple concept that was in the original book, which I believe that ordinary employees or employers should remember and take out of the book...

... and that is around their personal balance sheets and being able to distinguish between an asset and a liability.

It sounds like such a simple concept - if your income producing (cash positive) assets outweigh your liabilities then you're going to get ahead in the game.

The problem comes in when you can't distinguish between an asset and a liability on your balance sheet... don't worry - the concept has managed to flummox most of the geniuses on Wall Street so you're not alone.

It is an interesting exercise - write down your assets and liabliities.

Quick question here - how many of you put your house and your car down as "assets" and what value did you attribute to them? Do you owe any money on either your car or your house? Then it's not an asset in my opinion.

You might argue that there is "equity" in your house at the moment if you decided to sell it now. If you managed to successfully sell your house for more than you owe on it, THEN it becomes an asset. Until you've sold it, there is NO EQUITY in your house... remember this idea that there is inherent equity in your house is exactly what blew out the US market and guys that are trying to sell their houses now are quickly discovering this.

If I take R660 a month and I am servicing interest on a bond - then I don't classify that as having bought an asset. If however I took R500 + R160 in trading costs and I invested in a property unit trust or share which yields say 7.5% after tax THEN I would classify that as having a R500 asset...

It becomes an asset when it generates real cash in your bank.

For me - I felt I had hit some positive landmarks when my share portfolio for instance exceeded what I owed on my major liabilities. I then have a real asset to be able to A) generate cash and B) settle the liability at any given stage and remain "ahead of the game".

Go and have a look at your personal balance sheet again and see if you can identify what is an asset and then yourself similar goals to service your liabilites as quickly as possible and try and build up real assets.