The story on how I had an argument in absentia…with Robert Kiyosaki
Nothing kneads my brain like a question from someone who has almost no financial background. It becomes especially hard when a person askingquestion has already read a couple of popular "financebooks".
A friend of mine once asked me: "What are assets and what are liabilities?" I tried to explain to him in a very simple manner that assets are tangible and non-tangible stuff a company has to conduct operations, while liabilities are the means by which this stuff has been acquired. To make the things clear, I mentioned that machinery, vehicles and property are classified as assets, and loans and equity as liabilities.
Surprisingly enough, my friend replied that he did not doubt my competence, but, according to Robert Kiyosaki, a car (although it is a vehicle) should be classified as a liability.
I have never read anything by Mr. Kiyosaki, including his famous book "Rich Dad, Poor Dad". Thus, I found a video where he explains that buying cars, watches, jewelry is not a good way of money allocation, because all the aforementioned is a liability. Rich people focus on building their asset base, buying stocks and property, or by investing into their businesses. That is what Mr. Kiyosaki said.
At that moment I realised what my friend really meant. And there is a tricky thing.
When we look at any car from the point of view of a legal entity, it is an asset. There is no other variant, even though it may or may not be used to create profit. For a household, it is exactly the same asset, and it is heresy to classify it as a liability. But Robert Kiyosaki's main goal is to change the mentality of his readers, and not to follow the financial statement basics. Thus, he can use such a creative move.
The most important thing is to separate real corporate finance literature and popular literature. If it's easier for someone to convey to the masses that a car is not a good means of building a more prosperous future by classifying it as a liability, I don't mind.
But I also don't think it's any worse to explain to a person that any purchased asset has not only a cost of acquisition but also a cost of ownership. By the latter I mean the costs associated with operating and maintaining the asset in proper condition. The cost of ownership is not articulated anywhere, so few people really understand that when they buy a car or watch, they are hanging on to a deferred obligation to maintain it.
It is the discounted cost of ownership combined with the market value that determines the true value of the asset to its lucky owner. I think that was the idea behind R. Kiyosaki.
So I believe that an asset always remains an asset. It just can be an investment or a straight consumer good. But that's a different story.
What do you think about this?
