I recently happen to read “Rich Dad Poor Dad”. Although I do not completely accept everything in the book it really got me thinking about personal finance. The book’s main emphasis is on having more assets than liabilities. Until I read this book I thought I clearly knew what these two words “Assets” and “Liabilities” meant. My understanding was that “Asset” is something that is thought to increase its value in time and liability is the opposite. But the book goes a little further by adding that a good asset should generate income along with increase in value. A real estate property bought for a small amount during an economic slowdown becomes an asset when the economic booms again if it generates income via rent. Similarly an automobile , bought with a big EMI, that is rarely used by the owner becomes a liability.
The crowd mentality among majority of India’s software professionals is that any real estate is an asset. This triggers a mad drive to get hold of a real estate property. Some go beyond their means to buy really expensive real estate of small size. People spend a big part of their income paying EMI’s to the bank. Hoping for the day where the value of their investment grows many fold. Some other buy real estate property at far off places where there is less chances of infrastructure development. There is a huge risk involved in this. One of them would be that the real estate prices in the area would already have saturated during the time of purchase. Also one has to keep in mind if the price (not value) does really go high will somebody buy this small piece of real estate in the future. Remember asset is something that has to start giving you returns in the near or far future. If it fails to do so then you know. Another fact that is emphasised in the book is that self-occupied real estate is not really an asset as it does not generate income.
In order to make profit with real estate one has to come really early to the party and sell the property before it saturates. Otherwise you will be stuck with a liability rather than an asset. A commodity is not necessarily an asset to everyone for some it can be a liability as well. Hence choose your assets carefully. Do thorough home work before choosing to buy any commodity.
If you don’t find a good investment do not rush. Keep the money in the bank. Create a Fixed Deposit (Choose the right bank!!!). Even though it does not give the hope of a big return it is still safe and your money grows gradually. When you find a commodity that assures return for your buck go for it.
Coming back to the book, “Rich Dad Poor Dad” makes a very good effort in explaining what assets are and how should one choose assets.