Financial Management Basics: Assets vs Liabilities

Let's get back to basics this time around.

Without a sound fundamentals in investing it will be hard for us to become financially healthy let alone become financially free. I hereby discuss the difference between assets and liabilities and how you should differentiate the one from the other in order to have sound judgments in making your financial decisions.

First, let's define asset. According Wikipedia, in financial accounting, an asset is an economic resource. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash. On the other hand, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Let's tackle more on asset as there is a misconception here about how people tend to use the word assets in their financial life. With the definition of asset above, the following can be considered as assets as they are tangible/ intangible resources that can be converted into cash.

• Car
• House and lot
• Cellphone/ Laptop/ Gadgets
• Designer's bag
• Branded shoes and clothes

However, if you want to become financially sound you have to change your mindset a bit. If you are not familiar with Robert Kiyosaki, author of the book "Rich Dad Poor Dad" then this simple switch of mindset will help you become more financially savvy. 

According to Robert Kiyosaki, assets are anything that puts money in our pocket while liabilities takes money out from our pocket. Very simple huh? Yes, it's simple but it's very powerful. Being able to differentiate whether an item is an asset or a liability using this simple concept will either make you or break you in your journey towards financial freedom. Collect assets while you are young and it will forever give you abundance of time and money when the time comes to reap the seeds you've sowed. On the other hand, collect liabilities and you will never be able to get out of the rat race cycle finding yourself living from pay check to pay check. 

With all these change in mindset about what assets and liabilities truly are, let's differentiate again the items that we enumerated above whether it's an asset or a liability.

• Car - A car is a liability. Spending on gasoline and maintenance takes money out of your pocket. However, if you use your car in your business let's say car for rent business or you use it to deliver products to customers then you car should be considered as an asset.
• House - A house likewise is a liability. You spend money for repair and maintenance of your house. But just like your the car, it can be turned into an asset if somebody is renting it and it becomes a source of income through rental fee.  
• Cellphone - This gadget is also a liability. You spend hundreds of pesos for loading up so you could communicate with your friends and family. But if you use your phone for your business transactions then it should be considered as an asset. 
• Designer's bag - This is a liability. By this time, you should already understand that this can be converted into an asset if you know how to generate income out of it. I'll leave to your imagination on how to turn it into an asset as I don't have much knowledge about bags. 
• Branded shoes and clothes - This is another liability. Scenario is just the same with the designer's bag which can be converted into an asset.

There you go! I hope this post helped to clear out to identify what a real asset is. I would be glad if this would change your mindset on how you see things especially in making financial decisions. Take note to always prioritize assets over liabilities. It's not a good practice to buy liabilities thinking that anyway you can convert it into an asset if you want to. 

Treat assets like seeds. When you collect assets it's like your planting these seeds which would later on grow and will provide enough wealth to live the life you've always wanted. 

Why I started this blog?

Just a bit of a background. I'm an OFW working as a software developer/ programmer in Singapore. I started to become financially aware when I was 25 years old. Quite late huh? I think it's a bit late... I think I should have started when I was 21 when I got my first salary. But anyways, I cannot turn back time. 

The turning point was I was 25 years old and I realized I don't have enough savings after close to 5 years of working. I remember that time I was only able to save around 100 thousand pesos. I thought it's pitiful and I thought if I wanted to have a better future I need to do something about it. 

So I started to attend seminars. I have to be open minded. I will never be able to know the things I wanted to know if I wasn't open minded. That was my mindset. Our company held seminars about life insurance with investment features. I attended it and lo and behold, life insurance was my first investment. 

Until now I'm still paying for my insurance policy that I bought that time. It excites me to think that I have started investing and my money will grow which I can use in the future. In this seminar, I was able to meet like minded colleagues of mine who introduced me to a group that teaches financial literacy for free. Some of you might be familiar about it if you have heard the group IMG (International Marketing Group).

I regularly attended their seminars and it started to open my mind about the world of investing. Terms such as passive and active income, financial freedom, portfolio, stocks, bonds and mutual funds were all new to me. Every time I attended the free seminars, I listened attentively. I was like a sponge trying to understand every new information I was able to acquire. 

The terms that struck me though were passive income and financial freedom. These were the words that I was drawn into. I became interested how to have passive income in order to achieve financial freedom. 

After a year of being active in IMG, I had an opportunity to go abroad and find a job in Singapore. It was a risk but in God's grace I was able to find a job in Singapore. In Singapore I found another group similar with IMG. I guess it's the law of attraction. I want to be financially free and there will be opportunities that will come your way. I was glad I took that opportunity.

My journey to financial freedom is still ongoing and I know there are lots of people out there who wants to be financially free too. This is the reason why I started this blog, so I could blog my journey towards financial freedom and share it with people who are or want to be in the same journey. 

I also wanted to give value to my fellow filipino people by sharing my thoughts and experiences regarding financial management. I find it worthwhile reading financial bloggers and I thought we are on the same journey but for sure my experiences will never be the same like them. 

I believe we need more financial bloggers that are willing to share their experiences, thoughts and expertise so we could reach and educate more fellow filipinos. God bless us all! 

Why it's important to plan what to do with your money?

Let's get straight to the point. If you don't have any plans what to do with your money, other people will do their best to get it from you. And the bad news is these people I'm talking about are professionals in doing this. After all, they aren't in the position they are now if they weren't that good.

Let me ask you, how many times have you experienced coming out from work and passing by your favorite mall. You see this 50% off sale in one of your favorite shops.

You tell yourself you'll just check what's inside and see if there's any worth buying. You see something you like and you buy it while you rationalize that it's discounted anyways so it's a wise buy. The 1,000 pesos that you have been trying to save for the past week was gone in an instant.

I too was a victim of these professional. They know our weakness as consumers. They just place a big discount placard in front of their shop so they can lure us to spend our money that we have been saving.

The only way to avoid these temptations is if you already have planned out before hand what to do with your money. The basic formula of INCOME minus SAVINGS equals EXPENSES still comes very handy. Setting aside your savings first won't make you feel guilty in spending to buy your wants. However, take note that these savings is better to be out of your reach so as not to be tempted to use this money. If you can setup an auto debit from your bank account to invest a portion of your money to a mutual fund or something similar then that would be great. On the other hand, if you're disciplined enough to do the investing part manually it's also fine. The key here is to force yourself to convert the savings into assets as quickly as possible so you will have not option to spend it.

This is one of my mindset when it comes to budgeting my money and making a plan on how to use it properly. As a consumer it's easy to spend money for the very reason that there are a lot of tempting products out there. Latest gadgets, latest trend in fashion, newly opened restaurant and things like that will always be there. That's why I always think I have to make a plan how I should spend my money or else I will find myself spending all my hard earned money to things I don't really need or things that I can live without.

So plan carefully what to do with your money so you wouldn't feel bad or guilty later on when you realized where your money went. Make it a point to save and invest a portion of your income so you wouldn't be tempted to spend it especially if your savings is still accessible. Always remember if you don't plan for your money, somebody else is planning to get it from you.

Why you should invest in Real Estate?

Real estate is the latest investment vehicle I was getting myself into. Before, I never imagined myself investing in condominiums as I saw it as just showing off. However, this thinking changed when I was able to attend a seminar about real estate. It opened my mind to the world of real estate investing and how powerful it can be if you do it right. No wonder some famous and wealthy people I admire invests in a lot in real estate. There's Donald Trump, Robert Kiyosaki, even Shaquille O'Neal. For the local ones, there's Henry Sy, Manny Villar and Jaime Zobel de Ayala. 

 So what are the benefits in investing in real estate? Let me share with you four of the most important reasons why I find real estate investing worthy to add in your portfolio. 

1.) Using banks as leverage 

In real estate, you can get help from banks to pay your properties. What happens is you pay a down payment for the equity of your property. This amount varies depending on the real estate developer. The remaining balance can be paid through a bank loan. This is the only type of investment where you can use banks as leverage. You cannot do this with stocks or mutual funds. 

 2.) Passive income 

It's very common for OFWs to invest in lots, wait for its market value to appreciate and sell them. However, there's no cash flow during the waiting period. If your wise enough, you can add a property to your lot and have it rented. I invested in real estate with the goal of earning passive income from its rental fees. Real estate properties can be really good cash cows. Imagine if you have ten properties that are rented and earning something between 50 to 100 thousand pesos. You could already live financially free. 

3.) Increase in market value 

If you want to beat inflation, this is one of the ways to do it. You no longer have to worry prices going up every year. Real estate properties increase in market value over time and this can be very useful especially if you know how to liquidate this increase in market value. 

4.) Your property as collateral 

This is one of the main difference between real estate and paper asset investing. In real estate you can have your property as collateral to get loan which is a percentage of the market value of your property. The best thing here is you can do this no matter how many times you want. 

There you go! If you want to build tested and proven cash cows, consider investing in real estate.

Do not reinvent the wheel!

I find this topic interesting and wanted to share my thoughts about it. This has always been one of the factors why I try to seek answers to my questions when I was in my mid twenties on how to become financially free. My parents were both teachers and we were living an average lifestyle. My parents were able to give me and my sister our basic needs however I always wondered why we always stay in that level. Don't get me wrong. I'm not a materialistic person. I would just often think a lot of "what if we were wealthy?" and "how would it be like to live wealthy?". The more I grew older the more I wanted to seek the answers to these questions. I attended seminars which started with seminars that were held in the company I was working with before. One thing led to another and next thing I know I was introduced to a group which advocates financial literacy. This group by the way is called IMG (Internation Marketing Group). They give free seminars about financial management. I was a regular attendee to their seminars. I learned a lot from this organization and until now actually I'm still a member of this organization. I could say a big part of my character in terms of being financially savvy was because of this organization. They taught me a big lesson in life and that is not to reinvent the wheel.

Let us define this idiom. According to wikipedia, to reinvent the wheel is to duplicate a basic method that has already previously been created or optimized by others. Thus, the key here is if you want to achieve something in life, find a person who has been there and make him your own mentor. Consider it like a shortcut if you want to accelerate your progress in achieving a particular goal in life. If you want to become healthy, you look for a quality gym and survey for a guy you want to emulate may he be a regular customer of that gym or an instructor, befriend this guy and make him your mentor. Same goes when we were in college, let's say you want to be a good doctor or lawyer, you and your parents find a quality university that has excellent teachers or mentors that will bring our the best in you. One way or another, we have already done this in our life. Our parents are also considered as mentors. But in our journey in life, why do we forget this invaluable lesson in life?

That's the reason I usually have mentors in every aspect of my life. May it be in investing, self-development, salsa dancing (yes I dance salsa!), working out and the list goes on. The bottom line is DO NOT REINVENT THE WHEEL!