1. Loss of time,
during which other assets could have grown in value.
2. Loss of additional capital,
which could have been invested instead of paying for high-
maintenance expenses related directly to the home.
3. Loss of education.
Too often, people count their house and savings and retirement plans
as all they have in their asset column. Because they have no money to invest, they simply
don’t invest. This costs them investment experience. Most never become what the investment
world calls “a sophisticated investor.” And the best investments are usually first sold to
sophisticated investors, who then turn around and sell them to the people playing it safe.
I am not saying don’t buy a house. What I am saying is that you should understand the
difference between an asset and a liability. When I want a bigger house, I first buy assets
that will generate the cash flow to pay for the house.
My educated dad’s personal financial statement best demonstrates the life of someone caught
in the Rat Race. His expenses match his income, never allowing him enough left over to
invest in assets. As a result, his liabilities are larger than his assets.
The following diagram on the left shows my poor dad’s income statement. It is worth a
thousand words. It shows that his income and expenses are equal while his liabilities are
larger than his assets.
My rich dad’s personal financial statement on the right reflects the results of a life dedicated
to investing and minimizing liabilities.
Why the Rich Get Richer
A review of my rich dad’s financial statement shows why the rich get richer. The asset
column generates more than enough income to cover expenses, with the balance reinvested
into the asset column. The asset column continues to grow and, therefore, the income it
produces grows with it. The result is that the rich get richer!
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