The Secret to Building Wealth Most People Ignore

One of the reasons I believe most people never succeed at reaching financial independence is because they make things too complicated. They invest in elaborate investments they don’t understand, but heard some guy on television screaming to “buy, buy, buy!” They make fancy moves with their money, like taking out a second mortgage on their home to put down on a vacation home for the additional “tax benefits.”

All the highly technical, overly complicated wealth-building advice in the world can be boiled down to four words, that if followed will practically guarantee financial independence to those who follow:

“Buy Assets, Avoid Liabilities”

That’s it. Simply buy assets. Buy things that increase in value. Buy things that produce income. Avoid spending money earned in exchange for work on anything other than assets.

The problem is, most of us take the exact opposite approach. We buy liabilities. We buy things that depreciate in value – sometimes quite rapidly. We buy “experiences” like magical vacations. We spend an inordinate amount of money on entertainment, eating out, and expensive hobbies.

How do I know this? Because I spent the first 15 years of my adult life doing the exact same thing. I bought things on credit cards, racking up debts I couldn’t pay. I borrowed money to go to school. I spent every dime I earned, and then some, on the latest video game systems and cell phones and crap I didn’t really need.

Sure, a few of those things added some value to my life in the form of entertainment, or making things easier, etc. However, the large majority was a waste, because I can never reclaim those earnings. I can never reclaim the earnings that income could have amassed after being exposed to the magic of compound interest.

Now, I certainly don’t begrudge anyone who aspires to have nice things. In fact, I’ve enjoyed saving cash and buying a few things I put off for a few years while working towards debt freedom.

But one should recognize that for ever frivolous purchase, every spendthrift trip to the mall, we push financial freedom out a little further. If financial independence doesn’t happen to be a goal of yours, and you are quite happy working the rest of your life to pay monthly bills to banks, well, then you won’t have much of a problem continuing this trend.

For the rest of us, financial independence is a strong motivation on our day-to-day spending decisions, and certainly the larger life-altering decisions such as buying a house, a car, selecting a career field, etc.

From Liabilities to Assets

To start on a path towards building wealth you have to have sort of a mindset shift – away from acquiring more liabilities (things that suck money from your wallet in the form of monthly payments or depreciation) – and towards things that increase your bottom line (though appreciation and income).

Consider these two acquisitions, as a small-scale example:

  • $200 for a new smartphone. If you decide to buy one, chances are you are taking on another $70-$100 monthly expense in calling and data plans. That’s roughly $1,200 in the first year (including your $200 upfront cost of buying the phone).
  • $200 of Verizon stock. Verizon (VZ) currently yields roughly 5.4% in an annual dividend. Your $200 worth of stock would generate about $11 per year in dividend payments. Less than a dollar a month doesn’t sound like much, but it’s certainly cheaper than $1,200 in that first year. (Full disclosure, at the time of this writing I don’t own any stock in Verizon (VZ).

To carry this example further, assuming you decide to reinvest dividends, that $200 investment in Verizon would be worth $260.13 in five years, and that’s assuming no growth in the stock price itself and no increases to the dividend.

How much do you think that $200 smartphone will be worth in five years? Probably not much – an expensive paper weight, perhaps?

The initial investment amount is relatively low in this example, so the argument for buying assets doesn’t seem that compelling. However, multiply that example by five or ten times, to represent what you might spend on “less than necessary” items each month, and we are talking some serious money.

A $2,000 investment in Verizon stock at current yield levels would be worth about $2,601.55 in five years, assuming you reinvested dividends and the stock experiences zero growth and no increase in dividend payouts (not likely for a mature, healthy growth stock).

Another benefit of choosing assets over liabilities is that most of the time, assets don’t continue to drag on your cash flow in the way many liabilities do. In the above example, the monthly service charge for the phone quickly exceeds the cost of the phone itself, and continues to cost money as long as you keep it.

Not true of the Verizon stock, which after your initial purchase (and broker commission) won’t cost you a dime outside of taxes on dividend payments and taxes on any capital gains when you sell.

Flipping the Switch

The next time you are planning a major purchase, remember the above example and then ask yourself a few questions regarding your new potential purchase.

  • If I had to prepare a personal balance sheet, would this item be considered an asset or a liability?
  • Will this item add to my quality of life?
  • Will this item produce income for me, or will I have to spend additional earnings each month to service its ownership (to insure it, maintain it, operate it, etc) ?
  • Is the value of this item likely to increase over the next 5, 10, 20 years?

With the answers to these questions, chances are the decision to buy or not buy will become much easier. Always lean towards accumulating assets – in various well-diversified forms (real estate, precious metals, income-producing savings vehicles like CDs or bonds, etc.).

Minimize the acquisition of liabilities. Protect your cash flow earned from paid employment by diverting as much of it as possible into assets.

Be vigilant about protecting your earnings – you worked hard for them!

Be intentional. Give every dollar in your budget a name and stick to your plan.

Do this over time and you will begin to rely less and less on paid employment, and inch ever closer to financial independence.


  1. Great article. I find myself trying to keep this sort of thing in mind whenever contemplating purchases. I too wasted pretty much all of the money I earned in my 20’s, and am now finally grabbing a hold of my outflow.

  2. this is good advice.its amazing what a difference it can make. I swapped my mind set a number of years ago and the main result is a reduction in liabilities rather than an in crease in assets, but life is much easier for the change

  3. Frugal Dad, agree with your premise 100%. I would offer a couple observations. While some of us are lucky, after a lifetime of saving, to buy things like cars for cash, the reality is many people simply have to borrow and go into debt to pay for a car to get to work. Since it is a depreciating asset, I drive them till the wheels fall off (after always paying for regular maintenace so they last). Also, I look at education as an asset. Investing in yourself is the best investment you can make. While not always true, statistics show an investment in education will payoff over a lifetime of earning. Again, many have to go into debt to get an education.

    In these unsettling times, while investing in stocks will always be better than in a smartphone purchase, I feel the market is going to head for a “correction” and whether or not stocks are a good investment right now is somewhat of a crap shoot and also depends on your investing horizon. Personally, I invest in mutual funds to diversify the risk. Smaller reward, but lower risk. Even I got tired of this mantra and decided to invest in an individual stock. Ford was getting great press at the time, including the fact that they had to open new plants to increase capacity due to demand. Since my “brilliant” move, the stock is down $4 per share from the time I bought it! The good news is that it is a small investment and I can afford to sit on it.

    While I am not there yet, I have read some financial advisor comments that they would never buy another home. Turns out that a house is something to live it, not to be viewed as a surefire investment. Throw upkeep costs, taxes, etc. on top of the price of the home purchase and they advocate renting and putting any extra money elsewhere. Not sure I agree, but interesting. This may also have creedence with younger people who need to have geographic flexibility in job transfers, seeking a new job, etc. without a house being an anchor that one can not sell. The days of companies buying your home when you have a transfer opportunity are largely gone.

    Anyhow, some random thoughts for you.

  4. I guess Dividend is paid on Face Value and not on the market price of the equity. In the example of VERIZON, if the FV is USD 10 then 5.4% will work out to be 0.54 cents per year. Correct me if I am wrong.

    My problem with these types of analysis, in regards to “experiences”, is that it doesn’t account for the value of the experience. How do you value your time, experiences, memories with your family on your spreadsheet?

    Going on a European vacation and blowing your savings or putting the vacation on a credit card is really stupid. That’s quite a bit different than scraping together the cash to take said vacation. You seem to be turning your nose up at the very idea of “experiences” (quotes???). I want to pay for my experiences the right way but I don’t want to be old and retired and a bit larger pile of cash and without any experiences.

    • I should have included paid-for experiences in my caveat regarding the purchase of “nice things.” LIke I said in the post, I certainly don’t begrudge anyone for wanting nice things (or experiences), I just wish more people would consider where they are getting the money to fund them.

      If it is in the form of a credit card because they don’t have the money to pay for it then, well then I I feel like it is a waste because you will ultimately come to resent those experiences (at least I did).

      One of the best vacations we’ve ever taken was a simple retreat to a mountain cabin with my family – we split the bill a few ways and all paid cash. Now that was memorable!

  6. The only assets I’m comfortable owning right now are gold, silver, and investment in personal energy independence. The dollar is set to take a crash, house prices have crashed.

    My husband and I are set to retire early (in our late 40s) because we have no debt, a substantial savings account, and the ability to grow our own food and procure our own energy. It’s a great feeling of independence.

  7. Gooch, I thought of Rich Dad Poor Dad while reading this post too. If I remember correctly, he doesn’t consider your home an asset, because it costs you money vs. makes you money. This week I read an article about how the people hurt most by the recession were the people whose net worth were mostly tied up in their houses. Definitely good food for thought.

  8. So far I’ve been very good at limiting liabilities, but I haven’t done a great job of building assets. I suppose you could call my MBA, once it’s completed, an asset. Certainly I will have better odds at a high income and starting my own business having completed it. But I certainly feel lacking in passive income streams with a lot of my money sitting in cash in anticipation of tuition. I’m trying to learn more about investing so when I have truly disposable income again after graduation *knock on wood*, I’ll be able to best take advantage of it.

  9. It’s tough to follow such advice when you’re young and it becomes easier when getting older. Now that I have the money, I’m content with a shopping experience at Wall Mart for a $20 pair of jeans, spoiled by my wife who says don’t you have enough of them? 25 years ago, I wouldn’t have even entered Wall Mart but I had a nice credit card.
    The younger you start, the better it is but youth must happen.

  10. I love the idea of a “personal balance sheet”.

    Noticed that you didn’t incorporate the cost of the transaction (not many places you can trade stocks for free), but the concept of buying stock instead of a smart phone gets the point across.

    As a side question – what are your thoughts on high dividend yield stocks as investments?

    Allen, Gemini Finance

    • Allen, I generally like high-dividend payers, but only if they have a long history of high dividends (think dividend aristocrats). They are usually a great form income, not so great for growth. However, in a sideways market and low interest rates, a 4-5% yield is hard to find in other cash-based options.

      • Agreed. The 4.5% dividend yield is the the signal for me that it’s a relatively safe equity bet/dividend play, especially in a down market. I don’t own $VZ but have $T, which I got at right around 5% div yield.

  11. Within this same vein is buying timeless goods in used but fine condition. These items’ values often hold constant, so knowing you can sell for as much as you bought means your cost of ownership is close to nil.

    • Actually your money is then not earning anything if value holds constant and with inflation you still lose over the time of holding the goods.

  12. So where does buying CFL bulbs to replace incandescent lights fit into this theory? Or buying an energy efficient A/C to replace an old 25 year old energy inefficient A/C?

  13. Nice example about Verizon. The problem for many people is that it is fun to hold a new phone, but not so fun to buy $200 in stock – not just because it is stock but also because $200 in itself doesn’t help many people who are struggling financially.

  14. Jason, one of the posters makes a good point about passive incomes streams as a type of asset. Have you / will you do a post on potential passive income streams?

    • I have covered passive income streams a bit in the past. Search “passive income” in the search bar at top right of the site and it will display a number of posts.

  15. A smart phone is a useful tool that helps me run my business. Stock is a fine investment, but it goes up and down. I’ve lost money plenty of times buying single stock.

  16. I might have to get a “Buy Assets, Avoid Liabilities” tattoo on my arm now. It seems too simple to be profound but sometimes breaking things down can make them easier. I’m happy that I’m not much of a “needer” but I could still remind myself of your basic principle from time-to-time. Thanks 🙂

  17. I couldn’t help but think of the Rich Dad Poor Dad books when reading this. I agree wholeheartedly with your premise and am working on building up assets myself while focusing on cash flow.

  18. Nicely stated, Jason.

    I appreciate a post that simplifies the complicated nonsense down to basic rules that are undeniably true. If the goal is financial independence then buy assets – avoid consumption based liabilities.

    Simple enough. Undeniably true.

  19. How can you tell people to invest, when the markets are tanking and most people will probably lose 50% on there 401k in the next few months if the debt issue isn’t settled. Buy stocks is your answer, most people don’t even have the money right now to properly invest. Are you a stockbroker, financial analyst, or some other related job? What makes you an expert on anything. You chose Verizon as an example, but gold is at an all time high and increasing each day. Your expert advice seems misguided at best.

    • Brian,
      I don’t think FD is advocating equities specifically, only to put your earnings into assets (that generally increase in value over time) as opposed to liabilities, which will continue to cost to service (think debt payments).

    • Brian, I’m certainly not an expert; never claimed to be. I picked Verizon because it related to my cell phone example, and has a fairly strong dividend. I’m not advocating anyone buy their stock.

      As for the market tanking and buying gold, well, there is some logic to that theory – for sure. But, if I had said in February of 2009 to buy gold, some might have said I was crazy – cheap stocks are the place to be. In this rare case, you’d both be right!

      I’m not really a market timer. However, I do move in and out of cash when I see huge road bumps ahead. I think buying and holding through terribly long down periods is to voluntarily allow your capital to erode. Move to cash (which I have advocated here and on the Facebook fan page a number of times here recently), and after the market takes a tumble, look for some cheap equities to ride back up.

  20. Value is nice, but it can go up and down, and it cannot generate income unless you sell it. This disqualifies many items from being classified as assets. Income generating assets, such as stocks that pay dividends, businesses that are profitable, rental property, etc are what you should prefer over liabilities that, left to their own devices, don’t make you any money. This doesn’t mean you never buy them, because they can be useful for day-to-living or for making money, but you need to justify them. Even better, you fund them by buying income generating assets that will cover the cost of the liability.

  21. I think many people would be better off if they even just did the “avoid liabilities” part of the equation, but of course when you add in building assets, things get even better. That’s when you can fund those experiences. I spend probably 10% of my income on just travel – which would be a lot if I wasn’t saving and investing 35% or more at the same time.

  22. Great post! If I had a nickel for every time I’ve heard someone say things like “I just invested in a new cell phone” or “I’ve got to invest in a new car” I could retire wealthy. Too many people spend their whole lives ‘investing’ in liabilities… and never accumulate any real assets.

    Great example with the cell phone / stock.

  23. I started investing in only one stock on sharebuilder. MCD. I plan on investing $10K and then stopping to let the dividends reinvest. Of course, the best time to invest in MCD was in the past (hindsight). Who can tell if the stock will continue to trend upwards. I have a feeling that as long as the economy is doing poorly the stock will raise. My track record with growth mutual funds is not good. One’s time is another thing to invest in. I have spent about $200 in automobile parts to fix my car as the dealer wants over $2500 to do the work. My labor cost is just my time.

  24. Great read. The hard part is taking all the above advice and making it a habit. The best way to make buying assets vs expenses is to keep reading this type of information over and over. Dedicate less time to entertainment and more to saving money and building wealth. Make building wealth your entertainment! Thanks again.