Financial Freedom 101
The Amplified Impact Podcast
November 24th, 2023
Today, let’s dive into a crucial aspect of wealth-building: understanding assets, liabilities, and debt.
When I began my journey, I was clueless about money strategies, deep in debt, and living in a van.
The first lesson: assets put money in your pocket, while liabilities take money out.
Consider your home: yes, it’s an asset and a liability, but if it’s just an expense every month, it’s mainly a liability.
Same goes for your car…if it’s costing more than it’s making, it’s a liability.
Now, about debt: it’s a double-edged sword. Consumer debt for status symbols? Not great. But using it to acquire income-generating assets, like real estate, that’s savvy.
My advice? Master making money without debt before diving into sophisticated financial strategies.
TWEETABLE QUOTE:
“Your wealth building journey begins with understanding the difference between assets and liabilities.”
– Anthony Vicino
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Episode Transcript:
Anthony Vicino:
Alright, let’s talk about how to make some money. So years ago, when I started down my money making journey, I knew nothing about the rules of money, about the strategies of money. Nada. I had $80,000 of debt. I had like a $1,000 saved up in my bank account after having spent maybe a $1,000 on my 13 passenger van, which I was living in the back of in downtown Oakland. So like, I had no savings, I had no investment minutes. I had tons of debt. I had no idea what the frick I was doing.
Anthony Vicino:
Okay? It was from that place that I started to rebuild, or started to build, not rebuild, but started to build up a life built on financial literacy. And one of the very first things that I had to come to understand was the idea of assets and liabilities and what the difference between those are, because this is one of the ways that wealthy people think versus how middle class people think. This was a big mindset switch for me from what I’d grown up with. This wasn’t something that had been talked about in school or anything like that. Not really. At least in any kind of meaningful way. And so the idea of an asset is it’s something that puts money into your pocket, whereas an asset is something that takes money out of your pocket. And so the only thing that decides whether or not something is an asset or a liability is the flow of money towards or away from you.
Anthony Vicino:
And that is the oversimplified way that I want you to understand assets versus liabilities. And this is very important. So for instance, is your home, if you live in a single family home with a mortgage, is that an asset or is it a liability? Now, technically it’s both. It is both an asset and a liability because over time it’s probably appreciating you’re paying down the loan. And so there’s some value and equity getting built up inside the house. There’s a mortgage on there, so there’s debt. There’s a liability that you have to pay out every month towards that thing. But here’s the more impactful way to think about your primary residence in the form of a house is that it is just a liability.
Anthony Vicino:
Because every month money is leaving your account and it’s not coming back in. It might come back in someday, might come back in in ten years when you sell the house. Right? But for now it’s not, it’s just a liability. Now that’s the mindset that I want you to be in. Not to say that it’s one or the other, but to realize if you have to put money into it every single month, if you’re obligated to putting money into it and nothing is coming back to you in the short term, that is a liability. And our goal when we’re trying to build our wealth is to accumulate more assets than liabilities. So for instance, your car, is that an asset or is a liability? Well, are you paying out of the nose for it every month in your car? Payment for your insurance, for your gas? Okay, that looks like a liability. Now, are you maybe an Uber driver and you’re using that to generate revenue or cash flow? Well, if it’s generating more cash flow than it’s costing you in liabilities, then sure, it’s an asset.
Anthony Vicino:
But for most people that are just using the car to get to work or do whatever live their life, it’s more of a liability than it is an asset. Now the question becomes, would you be better served getting the car? Like taking the bus or the train for all those other things? That’s a different question. Just looking at things through the lens of is this an asset or is this a liability? Is very, very powerful way of conceptualizing your finances and your financial situation. Now, the aspect of this that’s really interesting is debt. Where does debt come into the equation? Because if you listen to guys like Dave Ramsey, who I think is a brilliant person and he has great advice and you should definitely listen to him, but recognize that it’s probably for a season of your life and he’s very much talking to a very particular persona. If you listen to him, he would say all debt is evil, as bad is to be avoided. And for me, I come from a more nuanced position. I think that debt is both a good thing and a bad thing, just depending on how you use it.
Anthony Vicino:
For instance, if you use debt, consumer debt, like a credit card just to go buy a purse, well, that purse isn’t putting money into your pocket, you’re putting money into its pocket, I guess. So it’s a liability regardless. If you’re using credit card to go buy shoes or buy things that you can’t afford because you don’t have the money in the bank, those are liabilities. Those are things, those are playing the status game, not the wealth game. But if you use that debt, say, to go get a mortgage and buy a house, and then you rent it out and every month, the renters that live in it, they’re paying more than the mortgage. And so you’re paying down the mortgage and you have additional cash flow coming in over the top, well, that’s an asset. And that, I think, is generally a pretty good use of debt. And that, in fact, is what we do.
Anthony Vicino:
We have about $85 million of assets. We own maybe around 40 apartment buildings here in the Twin Cities. And that is the fundamental premise. We use debt to go acquire these cash flowing assets. They cash flow more than the debt service, so we can pay that back and we keep the proceeds. So that is the good use of debt. But Dave Ramsey is right in the sense that debt is risky on a long enough time frame. Debt always introduces more risk because you have more obligations to somebody else to make payments.
Anthony Vicino:
So if the income source ever dries up your renters, ever leave, now this thing went from being an asset to a liability, and it can be a very, very big liability. So you just need to be aware of the picture. But I wanted to share this today because this is where your wealth building journey. If you’re just starting off from scratch, this is where it begins. Is starting to understand the difference between assets and liabilities. And then the next step from that is the role that debt needs to play in your life. And here’s my general recommendation is if you’re just starting off and you’re trying to figure out how to win the money game, do not use debt yet. Figure out how to make money without debt first.
Anthony Vicino:
Figure that out and then you can start using debt. Once you have the sophistication to learn how to make the money, to save the money and put away your rainy day fund, all that stuff. Once you have that capacity, then you can start exploring the more advanced techniques that incorporate debt. But do not use it to get yourself out of a hole. Debt should never be used to get out of a hole. That is a great way just to end up in an even deeper hole. So hope this brings you guys some value. As always, thanks for being here, guys.
Anthony Vicino:
We’ll catch you tomorrow. Until then, stay hyper focused, my friends.
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