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The billion-dollar asset

Armstrong Williams | 8/24/2011, 3:28 p.m.
At Thanksgiving, embracing the winds of change and increasing our faith

We need to start thinking about money as a verb, which is extremely appropriate because money causes action. Thousands, even millions upon millions, get up every morning for it. It causes economies to grow or falter; it allows people a choice of where to live, what to eat and often times who to associate with. Yet money itself is inert, and like an idea, it has no value unless it is actively employed or exchanged to get work accomplished. And just like an idea can be good or bad, money can be used constructively or destructively.

When money is used constructively, money creates or buys an asset. An asset is something that creates income, can appreciate in value and sometimes allows for tax advantages like a piece of real estate or a business. I would also add that the best assets to have are those that make you a return on your investment (i.e., puts money back in your pocket.).

When money is used destructively or irresponsibly, it creates a liability. A liability is something that depreciates in value or increases your expenses. In accounting terms, that means it takes money out of your pocket. Credit card debt, also called consumer debt, is the best and most extreme example of a liability because you continue to pay for something that provides you no benefit. Cars, for example, are another liability because they decrease in value over time and you pay insurance and maintenance. Unlike credit card debt, however, they do provide the benefit of transportation.

Building wealth is all about acquiring assets with assets. (A job is not an asset because you do not own it and you have no equity from it that you can pass on to someone else like you can with a business or real estate.) A person is an asset (or a liability!) and that's why companies have human resource divisions-to locate and place their assets.

What determines if people are assets (or liabilities) are two things everyone has: a body and a mind. From the neck down, a person's labor is worth about $20 an hour. So what is a person's value from the neck up? Billions of dollars. One's thought process is the only thing separating a janitor from a professor or a ditch digger from a billionaire. How do we think about how we spend our time and money? Do we look forward to spending it on entertainment or education?

Everybody pays for something, so we'll cover the difference between good expenses and bad expenses, good debt and bad debt. Although the difference may be intuitive, it is worth restating. Good debt is money (or time) spent that creates an asset that will give you a return on your investment, such as:

* A $400,000 real estate purchase that generates enough rental income to cover the mortgage, taxes and maintenance

* A business that has more customers than it can serve taking out a loan to expand its payroll or investment in equipment to meet the demand