By Dennis Ng (guest contributor)
The subject on personal finance is one that is widely discussed, and rightfully so. But with so much being taught on this topic, it is not surprising that many people are led to have misconceptions about the subject on personal finance. Prior to my fall during the 1998 financial crisis, I knew next to nothing about personal finance, until I was taught a hard lesson during the 1998 financial crisis.
In a bid to deepen my understanding on personal finance thereafter, I picked up Rich Dad, Poor Dad written by Robert Kiyosaki. Admittedly, it is one of the most popular books today. When I knew very little about personal finance, I actually believed and abided by every single word spelt out in the book. But as I grew my knowledge in personal finance and began to master my finances, I realised that not every word he said was correct. For one, I personally think that his definition of assets and liabilities are wrong.
According to Robert Kiyosaki, assets put money in your pockets, while liabilities take money from your pockets. In his book, he mentioned that cashflow is key. And based on these definitions, something is only considered an asset if it provides you with positive cashflow and puts money in your pocket. Conversely, if something takes money from your pocket, resulting in cash outflow, it is considered to be a liability.
But in my opinion, cashflow is not the key determinant of whether something is perceived to be an asset or liability. In my opinion, assets are simply what you own, while liabilities are simply what you owe. Contrary to what Robert Kiyosaki stands for, I believe that there are assets which do not provide us with any cash inflow, but have real value and are so seen to be valuable.
“Your house is not an asset”
In his book, Robert Kiyosaki went to the extent of saying that a house is not an asset, as one is unable to generate any income or cash inflow from the house. He even went on to elaborate that even if your house is fully paid for, it is still not an asset as it does not provide you with any cash inflow.
However, he has forgotten that in the long run, the value of a property typically goes up, as a result of inflation. So even if you are occupying your house and do not derive any income from owing it now, the fact that the value of your house goes up with time, means that you would benefit from the increase in the house’s value eventually.
Needless to say, everyone needs a shelter over their heads. So we would either rent a house, or buy one. If you decide to rent instead of buying a house, you would still need to pay rent. On the other hand, if you are to buy a house through a housing loan, you would then have a valuable asset that has a market value, once the loan has been fully paid for. If you are to buy a house when you are young and subsequently sell it for a smaller house, you would make money simply because the market value of the bigger house is more than that of the smaller house.
So in my opinion, a house is most certainly an asset—which is why the rich typically set out to own their homes, while the poor and some middle class individuals generally rent theirs.
“Uncompleted properties are liabilities”
Based on Robert Kiyosaki’s definition of assets and liabilities, it is suggested that any property still under construction is a liability, and not an asset, because an uncompleted property does not provide us with any rental income.
For which, if you had borrowed money to purchase an uncompleted property, money would flow out of your pocket to pay for monthly housing loan instalments when the property is still under construction. In which case, he seems to ignore the fact that investment returns from property come in two forms—rental income and/or capital appreciation of the property.
Contrary to his belief, the key to property investment is not cashflow, but the price paid for the property. For instance, if you had bought any uncompleted property at any location in 2004—when property market was in its doldrums—by the time the property is constructed in 2007, the market value of the property would have easily gone up by over 100%.
If you had listened to Robert Kiyosaki and avoided buying any property under construction as it would supposedly incur negative cashflow, you would have missed out on many opportunities to make money from property investments. And if one had waited until 2007 to buy the property, when it had been constructed and rented out, one would have to pay double the purchasing price. Assuming a rental yield of 4%, you would need to collect 25 years worth of rental income to make that same 100% from rent.
And if you had bought a property when its price was high and had been forced to sell when property prices were low, you would again suffer a big loss even if you had managed to rent out the property.
“Stocks without dividends are liabilities”
Again, if we are to follow Robert Kiyosaki’s definition of assets and liabilities, we would avoid buying any stock that does not pay a dividend. But many companies, when they are first listed in the stock exchange, typically do not pay dividends in their bid to retain its profits to expand its operations. Are these companies then necessarily deemed to be a liability?
For instance, when Google was first listed a few years ago, it did not pay any dividends. And if you had heeded Robert Kiyosaki’s advice to not buy stocks of companies that do not pay out dividends, you would have missed the opportunity to invest in Google when its share price was just valued at US$85. Today, Google does give out dividends and its share price is valued at about US$400, or a 370% increment. In which case, in order to earn returns that amount to 370% equivalent in dividends, assuming a dividend yield of 5%, you would have to wait a long 74 years!
“Anything that does not provide cashflow is a liability”
If you are to listen to Robert Kiyosaki, you will never be seen buying any antique, art piece, fine wine or collectors’ item, simply because they do not provide us with any income or cashflow. Yet, it is common knowledge that the value of many antiques, collectors’ items, art pieces and fine wine do go up significantly over time. Again, if you are to listen to him, you would also not invest in gold or silver, since they do not provide one with any cashflow. However, we know that commodities such as gold and silver might be a good hedge against inflation.
In fact, such is the investment prospects of these commodities that in 2010, gold prices shot up from US$1,000 to over US$1,500, representing a growth of 50%. In the same year, silver prices reported a bigger increase, rising from about US$17 to over US$30, representing a growth of 76%!
Although gold and silver could potentially be lucrative investments, one must exercise caution when investing in them. In which case, be warned that investing in gold and silver do not provide one with any income or interest. So if an individual or company claims that they are able to offer you high interest by investing into physical gold or silver, it could really turn out to be a scam instead.
Regardless of the investment vehicle we take interest in, it is essential for us to grow our financial knowledge in general. Failing which, we might not become the savvy investor that we so long to be and miss out on the many investment opportunities out there.
By guest contributor Dennis Ng, Director of Leverage Holding and Master Your Finance.
Excerpted from his latest book, What Your School Never Taught You About Money. For a limited time Propwise.sg readers can buy the hardcopy book at just $23 including free delivery (within Singapore), more than 20% off the usual price of $28.90. Click here to get it now