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How to Pay for the Things You Want

Understand the difference between assets and liabilities, know which is which, and quit borrowing to pay for liabilities. It's making you poor.

August 07, 2017  |  by Adam Doran

If you have a mortgage on the home you live in then it is not an asset. It is the bank's asset. It is your liability. Photo courtesy of Getty Images.
If you have a mortgage on the home you live in then it is not an asset. It is the bank's asset. It is your liability. Photo courtesy of Getty Images.
Quick question: Is your home an asset? If you answered yes, keep reading. I know you've heard realtors, insurance agents, mortgage lenders, accountants, and probably other "experts" tell you that your home is your biggest asset. But it's not. Let me explain…

Does your house write you a check every month, or do you write a check every month for your house? See where I'm going with this? Assets don't cost you money while you own them, they pay you money. Therefore, the house you live in is not an asset. If you have a mortgage payment, your house is the bank's asset. It's your liability.

Next question (this is a test): Is your car an asset?

No? Good. We're making progress. If you answered "Yes," you need to re-read the preceding paragraphs.

Now, I'm not saying liabilities are a bad thing. If you want to enjoy life, you're going to have some liabilities — some things that cost you money. You should have a house, a car, and other nice things that make life easier and more enjoyable. The problem is that most Americans, including law enforcement officers, fill their life with liabilities, thinking they're assets, and once they're six figures in debt and can't get out they wonder what the heck happened.

Any business you own — a home business or a brick-and-mortar shop — is an asset if it produces regular income for you. Photo courtesy of Getty Images.
Any business you own — a home business or a brick-and-mortar shop — is an asset if it produces regular income for you. Photo courtesy of Getty Images.
Does either of these sound like something you've thought or that you've heard someone else say? "We thought this home was a great investment at the time, but now we can hardly make the payments." Or "I thought this minivan was the perfect investment for our growing family, but now I still owe thousands and it keeps breaking down."

These situations are preventable. And here's how you do it.

Start with this: Quit calling your home or your car an investment. It's not. It doesn't put more money into your life, it sucks money out. These things are liabilities, not assets.

Since most of us have been mis-labeling liabilities by calling them assets all our lives, let's take a moment to understand what assets really are. There are four types of assets that actually produce income in your life: real estate, business, paper, and cash.

Real Estate — Real estate doesn't mean your house. We're talking about investment real estate such as a rental property that produces regular income, which makes it an asset.

Business — Business is just that. If you own a home business, or a brick-and-mortar business like a coffee shop, it's an asset if it produces regular income.

Paper — Paper assets are stocks, bonds, mutual funds, and private loans. These usually pay you in the form of dividends or interest.

Cash — Cash gives you the ability to make a purchase immediately and better your wealth position or increase your income. By virtue of that, it is an asset.

Cash gives you the ability to make a purchase immediately and better your wealth position or increase your income. By virtue of that, it is an asset. Photo courtesy of Getty Images.
Cash gives you the ability to make a purchase immediately and better your wealth position or increase your income. By virtue of that, it is an asset. Photo courtesy of Getty Images.
Now that we've discussed what assets really are, let's talk about how you can set yourself up for success like the wealthy do. Wealthy people understand that in order to have liabilities, it's smart to first create or purchase assets that will fund those liabilities.

Let's say you want to buy a boat. When most people want to do that, they take out a loan and make monthly payments with interest so they can have the boat. This puts them behind in two ways: One, they just went into debt (the opposite of building wealth), and two, they acquired a liability (the boat) that loses value and requires maintenance regularly. It will do nothing but cost them more and more money over time. It's a great way to accelerate the process of getting poor.

Here's the way a wealthy person acquires a boat. A wealthy person asks, "How much money do I need to purchase the boat?" Then they ask, "What's an asset I can purchase or create that will provide the income to pay for the boat?"

Let's say the boat payment is going to be $400 per month. A wealthy person goes out and buys a rental property, creates a business, buys stock, or issues a private loan that produces $400 per month of income, then buys the boat once the asset is in place to pay for it.

This builds wealth in two ways: It adds a new income stream and increased the person's income $400/month; in addition, the person acquired an asset that will likely grow in value with time. They're set up to collect more paychecks over time, and they always have the option to sell the asset at a profit whenever the market is right. It's the best way to accelerate getting wealthy.

You're probably thinking, "Doing that takes a lot of time to build up the money for the stuff I want." That's true. But doesn't it take a long time to climb out of debt, too? And if you have to work a ton of overtime to make those payments, when will you have time to enjoy the thing you just couldn't wait to have? How long do you want to be poor? Is it enjoyable, knowing you're gonna hand your whole paycheck over to creditors every month for the next 10, 20, or 30 years?

The wealthy embrace the principle of delayed gratification. They'll work hard for a few years building a business, or wait patiently, saving their rental income to purchase that hot sports car. And if the wealthy can wait, so can you.

Of course, there is a way to compress that time a little…

If you want to buy a boat, find a way to make the money needed to purchase it first. This may mean waiting to use the boat, but it will also keep you out of debt. Photo courtesy of Getty Images.
If you want to buy a boat, find a way to make the money needed to purchase it first. This may mean waiting to use the boat, but it will also keep you out of debt. Photo courtesy of Getty Images.
You are an asset as well. You have the ability to produce income on demand, by offering services and products of your own for sale. That makes you a business: YOU, Inc. You can raise hundreds of dollars with a garage sale or driving for Uber. You can raise thousands of dollars selling on eBay or Amazon. Your options for additional income are only limited by your creativity.

The point is: Understand the difference between assets and liabilities, know which is which, and quit borrowing to pay for liabilities. It's making you poor.

Do what the wealthy do, and leverage assets to produce the income required to buy the things you want.

Did you get value from this? Do you have questions? You can email me: [email protected] and I will personally respond. It's my mission to help my law enforcement family master their money and enjoy life more.

Adam Doran is a 15-year veteran police officer from the Kansas City area. You can connect with him through his Website, www.copfinance.com, or e-mail him directly at [email protected].


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