by Philip Caputo

Created on: January 23, 2009

If there was a secret to accumulating at least a billion dollars, do you think it would be published on the six o'clock news? I don't think so. There is a secret however, to accumulating riches. It is after all, no get-rich-quick scheme. The single most important factor to becoming filthy rich, is to invest time into your financial education. With financial education comes financial literacy. Financial literacy is the knowledge and understanding of financial statements, cash-flow, and the difference between an asset and a liability. It is very important to understand this distinction between an asset and a liability. Most people believe that their home is their biggest asset. Who told you that it was - your banker. Now while the banker is not exactly lying to you, they are however, not telling you whose asset it really is.

If you believe your banker because he/she is a banker, then you will probably never accumulate any measure of wealth. This is because you falsely believe that a liability is an asset and vise-versa. Think about this for a moment. If an asset produces income, and income puts money into your pocket, then we can define an asset as anything that puts money into your pocket. Now a liability produces expenses correct? Expenses take money out of your pocket, so we can define a liability as anything that takes money out of your pocket. Now that we understand the correct definitions of what an asset and a liability are, we can apply this knowledge.

The banker mentioned above, can legally tell you that your house is an asset, becuase for every financial security, it is at once both an asset and a liability. This is true for any and all financial securities. Think about it. If an asset puts money into your pocket, where is this money coming from? From some other pocket. Let's take a look at your house and see how this applies.

Your house, the one you live in, is a financial security. Every financial security is at once an asset and a liability. So if this house takes money out of your pocket with the mortgage payment, insurance, property taxes, and maintenance, then this house by definition is a liability. Be that as it may, it is the banks asset. If your mortgage payment takes money out of your pocket and puts it into your bankers pocket, then this clearly is income to the bank and hence is an asset for that bank. The only asset that you have in your house, is the equity that you have put into it. That part of the mortgage that you have paid back. Do you understand. Good.

So the secret to acquiring a fortune I believe, is financial education. It is with this knowledge that you can begin making desicions that will increase your net worth. I hope this little article has been of value to you. Good-Luck to you aspiring future billionaires!

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