Liz Koh: Assets, liabilities, cashflow smart way

Credit card debt can weigh you down.

Liabilities are things that drain your financial resources rather than adding to your wealth ... credit card debts are an example." Wealth guru Robert Kiyosaki reckons there are three important financial concepts which, if you understand them, will greatly increase your prospects for building wealth. They are assets, liabilities and cashflow. These concepts are inter-related and the trick is to get them working together to maximise your wealth.

Assets have a value, can be readily sold, and either increase in value over time or produce an income.

Examples of assets are property, a business or "paper" assets, such as shares and bonds. The investment return you receive from an asset comprises the change in value plus the income.

For instance, if a property worth $500,000 increases in value by 5 per cent in a year and produces a net rental income of $20,000 (4 per cent of the value), the total return from the asset is 9 per cent. Compare this to a car, which drops in value every year and costs money to run.

Liabilities drain your financial resources rather than adding to your wealth. Mortgages and credit card debts are two examples. Keeping liabilities to a minimum helps stop the drain on your finances. The exception, of course, is debt incurred to buy assets that produce a good return. Borrowing will add to your wealth if the net cost of debt (the interest) is less than the net return on the asset.

Cashflow is the amount of money coming in and going out. The net cashflow is the difference between money coming in and money going out. For your wealth to increase, your net cashflow has to be a positive number.

If it is negative, your wealth is decreasing.

Smart investors are those who know how to use cashflow to buy assets and to keep liabilities low.

Liz Koh is an authorised financial adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free by calling 0800 273 847. For free ebooks see moneymax.co.nz and moneymaxcoach.com