I read the most astounding paragraph in the June 19th, 2018 edition of USA Today. In Wealth of Millionaires Surges 10.6% to top $70 Trillion for the First Time, David Carrig was reporting on the World Wealth Report 2018 recently released from global consulting firm Capgemini. It was the third paragraph of the article that really caught my attention,
The number of high net worth individuals (HNWI) – which Capgemini defines as those having investable assets of $1 million or more excluding primary residence, collectibles, consumables and consumer durables – grew almost 10 percent, or 1.6 million to 18.1 million in 2017.
After reading the title of the article, I wondered if this was supposed to be a shocking paragraph? Was it something to get the readership wound up enough to raise their collective fist in anger and yell, “Life’s unfair?”
If it was, then my response was wholly different. I read the paragraph, then circled back to the beginning to make sure I had read it correctly, before saying to myself, “No shit.”
Hiding in Plain Sight
Maybe that paragraph and the full article wasn’t meant to inflame emotions about the unfairness of equity in our country. I’ve read the short article several times and it appears to be balanced. It was simply pointing out that the wealth of High Net Worth Individuals continues to grow faster than the rest of the population. However, with “surges” in the title it’s natural to expect the article to take on a slanted tone against those gaining wealth.
What I found interesting is that amid the reporting on how well the rich are doing in this economy was the secret on how to actually become wealthy. I’m not even sure if the reporter had realized he’d written it.
The secret was contained within that paragraph I called out above. It was so simple that most will miss it, focusing rather on their own jealousy, rage, or apathy, instead of what was really important – learning how to acquire wealth.
Have you reread the paragraph to find the secret? If you haven’t (or if you have, and can’t find it), here it is –
If you want to be a High Net Worth Individual, focus on buying assets. For clarification, assets are not your primary residence, collectibles, consumables, or durables.
Done. That’s it.
The whole effin’ secret was wrapped up in that simple paragraph, but a reader may have been inclined to miss it they were focused on anger not education, jealousy not improvement.
But if you’re here, you’re like me and looking for ways to get better. So, let’s dig into this secret (okay, it’s not-so-sercret). First, let’s talk about the items that were pulled out from the asset classification. I like these categories so much I’m going to call them the “poor four” – primary residence, collectibles, consumables, and durables.
Your House is Not an Asset
This is not a new concept, but people are still resistant to grasp it. Of course, this is only natural since people always wrap emotions into their homes. You have to expect that when they apply silly terms like “dream home” and “forever home” to houses they eventually sell. You don’t sell forever, and you don’t sell your dreams. But people willingly do this over and over again. Just watch your friends. Or maybe you’re even thinking, “I’ve done this.” I know have.
I first learned of the “your house is not an asset” concept in Robert Kiyosaki’s book, Rich Dad, Poor Dad. Your primary residence is a big ball of liabilities wrapped up in the comforting lie that it is your biggest asset. If you believe that, you’re a moron. Don’t be a moron.
Every month you shell money out in the form of mortgage payments, property taxes, insurance payments, maintenance costs, utility payments, and upgrades. Money is going the wrong way. This is not the concept of cash flow.
Yes, there is a utility benefit to living in the house, but it’s still a liability, much the way if you were living in an apartment.
The only time your house becomes an asset is the moment you sell it and you pull the cash from it. Until then it is an expense-inducing liability.
What if we pulled cash from the home’s equity? some may ask. Doesn’t that make it an asset? Definitely not. You just made it a bigger liability. Treating your house like an ATM is a sucker’s game. Sure, you have some cash today, but you must pay that money back with interest.
Now, I’m not saying that the wealthy don’t have homes. Not even close. However, they don’t wrap their concept of wealth into their house.
Too many people overbuy their first home, then they repeat this error with their second home, etc. Some even believe the concept of “laddering up” is building wealth. They never work to pay down their loan. In fact, they may look to even burden their home with a second mortgage to fund additional construction projects or add a home equity line of credit which acts like a big credit card.
What about appreciation? others will certainly yell. Appreciation is gravy. It’s a bonus. If you’re lucky enough to get appreciation on your house when you sell, then fantastic. But appreciation only counts when you sell, or you refinance, but both are single moment events. Both put money in your pocket, but one requires you to pay it back. Neither provide a reoccurring stream of cash flows. And selling your primary residence leaves you a problem – where do you live now?
No, a primary residence is not an asset. If you still think it is, you will not be a High Net Worth Individual.
Beanie Babies and Beer Cans
The second item in the Poor Four is Collectibles. We all know collectibles when we see then, but I pulled a clear and concise definition from Investopedia so we’d all be on the same page.
A collectible is an item that is worth far more than it was originally sold for because of its rarity and/or popular demand. Common categories of collectibles include antiques, toys, coins, comic books and stamps. The term collectible is sometimes applied to new items that have been mass-produced and are currently for sale. This is a marketing gimmick used to stoke consumer demand. Items that are currently for sale may run into supply issues that drive up the price asked for by resellers, but this is a different phenomenon from what is driving the value of true collectibles.
I told my story of buying comic books, toys, and other stupid stuff in the article I Was Broke Because I Wanted to Be. I thought these collectibles would someday make me rich. Wrong. I spent thousands, tens of thousands to be correct, in the erroneous belief that I was building something for my future. When I finally decided to sell all my collectibles, I did make some money, but it was a fraction of what I spent. Also, I would never get back the time I wasted chasing around collectible comics or the rare variant Daredevil action figure.
People have collected all sorts of silly things with the hopes of someday hitting the big payday – Beanie Babies, beer cans, spoons, bells, and tobacco pipes to name a handful. If you can think of same random stupid stuff, you might be surprised to find someone collects it.
Do you want to know what a High Net Worth Individual collects?
Stocks. Bonds. Businesses. Real Estate. Things that have true value and can continue to make money. Their focus isn’t on pop culture, it’s on real value.
If your attention is on collectibles, you’ll never be a High Net Worth Individual.
Here Today, Gone Tomorrow
Our next entry into the Poor Four is "consumables." Another definition from Investopedia,
Consumables are goods used by individuals and businesses that must be replaced regularly because they wear out or are used up. They can also be defined as the components of an end product that is used up or permanently altered in the process of manufacturing such as semiconductor wafers and basic chemicals.
Okay, so groceries are consumables. So is make-up and shampoo. Clothes are also consumables since we will wear them out and replace them every year or two. We all need groceries and clothes and wouldn’t think about counting them towards our wealth, right? Why even mention consumables as part of this discussion?
Businesses purchase consumables as part of their business model. Consider a hotel. They purchase shampoo, laundry detergent, food, and uniforms for daily consumption/use. It might show somewhere on their books as inventory.
Someone might get the idea that they could consider these items (especially clothes) as part of their personal wealth. But it’s not. We don’t need to spend too much time on this. That expensive pair of Jimmy Choo shoes in your closet does not count towards your wealth. If you want it to, you will not be a High Net Worth Individual.
The Price of Their Toys
Okay, so here is the real difference between the wealthy and the poor, the rich and the middle-class. According to the article the fourth item excluded from consideration of wealth is the “consumer durable.” According to Investopedia,
Durables is a category of consumer goods that do not have to be purchased frequently. Some examples of durables are appliances, home and office furnishings, lawn and garden equipment, consumer electronics, toys, small tools, sporting goods, photographic equipment, jewelry, motor vehicles and motor vehicle parts, turbines and semiconductors. Also known as "durable goods," they tend to last for at least three years.
So what kind of durables do you have in your home? A washing machine. A dryer. A television. Sofa. Kitchen table and chairs. A bed and mattress set.
Boring, ho-hum stuff.
Let’s talk about exiting things! There is an old saying, “The only difference between men and boys is the price of their toys.” Cars are a durable. Four-wheelers and the trailers to haul them around are durables. RVs and boats are considered durables. Motorcycles! Don’t forget them. They are durables, for sure. Toys! Loud, raucous, fast toys!
If you think that your jacked-up monster truck is an asset, you will never be a High Net Worth Individual.
Wait! The Bank Says Those Things are Assets!
If you’ve ever applied for a loan through your friendly neighborhood bank, I’m sure you’ve had to complete a Personal Financial Sheet (PFS).
On that PFS, you will provide certain information like your salary, how much you have in savings and how much you have in your retirement account.
Then the bank asks questions like – do you own your home and how much is it worth? Is there a mortgage against it? The bank is obviously telling you that your home is an asset, right?
The bank then asks how many vehicles you own and what they are worth? Are there any loans against them? Again, they are establishing a value for those items which goes towards your total net worth. Assets, right?
The bank even has a column for “Household Items.” They are allowing you to provide a figure for all of the crap that you have inside your house, so you can put it on that PFS. If they are allowing you to count it towards your net worth, your clothes (consumables), Beanie Babies (collectibles) and multiple TVs (durables) are certainly assets, right?
The banks aren’t wrong, are they? They aren't messing with you, are they?
I’ve said it before and I will say it again, THE BANK IS NOT YOUR FRIEND.
I’m going to turn into my parents for a moment and say, “If the bank told you to jump off the bridge, would you?” Of course, not. Then why would you believe them when they say your cars and other household items are assets?
The banks want to give us loans. They need us take loans from them to continue their business. If they actually looked at the net worth of the average citizen, do you think they would give out loans? Let me ask you this, would you give a loan to the average citizen knowing how they save and spend? Probably not.
The game must be played to raise the net worth of the average borrower. So, the bank lets us call our cars assets. Seriously? Unless it is fully owned and operated as part of a business, tell me how a car can truly be considered an asset. It can’t. It’s a full-time liability even if it is paid off. You must pay auto insurance, keep it filled with gas, keep it operational, etc. The only moment your personal vehicle can pretend to be an asset is if it is sold. And, yes, I know that is what the bank claims they are doing – detailing how much money a person can raise if they sold everything. But until that moment, those items – cars, boats, RVs, personal houses are liabilities hiding behind the untruth (lie) that they are assets.
Pretending that all that crap is something else will limit the growth and speed of growth into a High Net Worth Individual.
What is an Asset Then?
An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.
I love Investopedia. It’s a great resource and I reference it quite a bit, but I’m going to go with Robert Kiyosaki’s definition of Asset because it’s simple and easy. Paraphrasing,
An Asset puts money into your pocket while a Liability takes money out.
What does an asset look like?
- Income-producing real estate immediately fits this bill. Rental houses. Duplexes and Triplexes. Commercial real estate, of course!
- What about stocks? Dividend producing stock, most definitely an asset. If you’re buying stock solely for appreciation, then no, not so much.
- Do you own a business? That is an asset.
- Have you written a book that you’re selling? Asset.
- Do you own an income-producing blog? Asset.
There are all sorts of things you can own/create that will put money into your pocket.
The hardest thing for me regarding assets and liabilities was to change my mindset. I had previously been a person who focused on purchasing consumables, collectibles, and durables, not assets. I wanted to believe that my comic books and toys were assets. I desperately wanted to believe that my house was an asset.
Just because I wanted something to be true didn't make it true. That’s the whole issue with “fake news.” People don’t like what they are hearing so they immediately say, “That’s fake.”
Children do the same thing when they close their eyes, cover their ears and say, “Na-na-na.”
Let’s not act like children when it comes to assets and liabilities.
So there you have it. The basic secret to wealth.
And for further clarification, assets are NOT your home, collectibles, consumables, or consumer durables.
If you’re focusing your time and energy on the “poor four”, you’ll never be a High Net Worth Individual.
Why does it have to be harder than that?