Webster dictionary defines 'WRONG' as something that is 'not functioning properly'. Therefore, wrong assets are those assets that are not functioning properly. This brings us to the question: How do assets function?
We create assets to meet our future financial responsibilities and dreams. We liquidate (sell them to get cash) them in times of difficulties.
The main function of our assets is to increase our wealth over a period of time and generate income for us, either immediately or sometime in the future. A non-functioning or wrong asset is one that does not generate income for us; it can even decrease our wealth as most of them erode in their value.
Famous author Robert Kiyosaki has defined assets in a somewhat unique way. The ones that place money in our pocket are assets (or the right assets) while the ones that take money away from us are liabilities (wrong assets).
Wrong assets are usually related to our lifestyle. Having more cars than needed, expensive mobiles, laptops, etc, can be categorised as wrong assets. These are assets that will not give us any returns. In fact, they will consume our income.
On the other hand, when we invest in fixed deposits, mutual funds, direct equity, government bonds, we get returns. Some of them generate returns immediately while some generate returns after a few years. All these are income generating assets and, hence, the 'right' assets.
There is plethora of stories about famous personalities who earned in millions during their hey days. Unfortunately, since they did not create assets, they spent their last day in poverty.
We also know of many royal families who have converted their large palaces and havelis into hotels. Earlier, these families were struggling for routine expenses as well as expenses to maintain those palatial houses.
One of the main reasons for this is that while they were earning in millions, they were creating income consuming assets also in millions. When their down time started, those wrong assets did not generate returns for their survival; in fact, they had to spend money to maintain those assets.
I am not suggesting that you avoid buying cars or laptops. All I am saying is do not treat them as your assets. In times of need, not only will they not generate income, they will actually consume it. Also, once we are used to a lavish lifestyle it is difficult to curtail it in our latter years or difficult years.
While creating assets, think slightly different from the way accountants think.
According to an accountant, everything that we own are our assets and everything that we owe are our liabilities. From our long-term wealth creation perspective, everything that generates income for us is an asset and the rest is liability.
Gaurav Mashruwala is a certified financial planner. He can be reached at gmashruwala@gmail.om.