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Assets and Liabilities

One of my all time favorite books on personal finance is “Rich Dad, Poor Dad.” I have mentioned it before and I strongly recommend everyone to read this book, but for those who don’t have the time I am condensing a concept the writer puts forward in his book. Basically he suggests that people should look at their personal situation as a balance sheet, in the same way one would look at the balance sheet of a company. When deciding how to spend your hard earned cash with a view towards creating long term wealth, he suggests that it is preferable to put it into assets instead of liabilities. This sounds quite simple but he breaks from the traditional accounting measures in how he describes the two.

If you are planning to invest heavily in Myanmar it might be a good idea to try and use his criteria when evaluating your options.

The main difference in the way he defines the two, is simply that if something will generate future cash flows it is an asset, if it will require you to put more cash into it, than it is a liability. It is easy to see how a sailboat, with the constant maintenance, would easily fall into the category of liability. However, if this boat is clearing the maintenance costs by being engaged in the tourist industry successfully (the key word here is “successfully”), then this same purchase would be considered an asset. A property could be looked at in the same light; a rental property would be an asset while your primary residence is most likely a liability that requires payment of taxes and maintenance.

Of course capital appreciation could prove quite profitable in the long run, but the idea is to create a portfolio of assets that will pay out regularly, or at least not require a constant influx of capital. This is the road to financial freedom.

One major goal of financial planning is to avoid ever getting into a cash crunch. Cash flow problems are the number one reason why businesses fail, and often these are business that otherwise would be very profitable. I agree with Mr Kiyosaki, the author of the book, that we ought to treat our personal financial lives as a business and watch that cash flow very carefully.

High dividend paying stocks are an example of why you need to be careful about following his advice too far without balancing the need for cash flow with capital appreciation. At the peak of a stock market run, dividend paying could be classified as a cash flow positive asset but if you buy in just before a crash your principal has now become illiquid until the markets recover. Over the last 100 years stock market crashes have come on average about every five years. We have now had five up years in a row, so I would be patient and wait for the next crash to go heavily into the markets, even if you find some good companies already with nice dividend yields. They will be even more attractive when the overall market is trading at multiples of earnings that actually make sense.

David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK pension transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and advises on pensions and taxation. Views expressed here are his own.

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