Tag Archives: economics

When Assets Become Liabilities

When Assets Become Liabilities

by Dave Pratt

Look up the definition of asset in Webster and it’ll tell you an asset is “anything owned that has value.” But Webster has it wrong.  If I put a down payment on a ranch, financing the balance, the full value of the land shows up in the asset column of my balance sheet, but I don’t own the whole ranch. The bank probably owns more of it than I do. No, an asset isn’t necessarily something you own. An asset is something you have. Your net worth (Assets-Liabilities) is what you actually own.

Although your banker would disagree, there is a completely different way to define assets. In his best seller, Rich Dad, Poor Dad, Robert Kiyosaki defines assets as “things that put money in your pocket” and liabilities as “things that take money out of your pocket.” Between monthly principle payments, interest, insurance, maintenance and repairs, most of the things your banker calls assets are, according to Kiyosaki, really liabilities.

Ironically, the fancy cars and homes that we see as the trappings of wealth are actually huge constraints to generating wealth. That doesn’t mean we can’t enjoy the finer things in life, but until we build a wealth generating machine as our foundation, buying “liabilities” will slow, and may block, our ability to create wealth.

There is an even bigger problem with assets.

In the final chapter of his wonderful book, Nourishment, Fred Provenza writes about taking a sabbatical to Australia with his family. To finance the trip he needed to sell their home in Utah. He explains that he didn’t build the house himself, but had done a lot of work on it and had “a lot of skin in the game.” Unfortunately, at the time of the sale the housing market was very depressed and, while they got their investment back, they didn’t get much more. Between the time of the sale and their trip to Australia, they rented a smaller house Fred called “the dump.” At first he was resentful of having to give up owning his “castle.” But after a couple of weeks in the dump he began to realize that he hadn’t owned the house he’d helped build. He explained,  “It owned me.” It owned him financially, requiring huge monthly payments. Even after the sale, it owned him emotionally.

Assets can clutter our space and minds, causing distractions and stress. They make it more difficult to clean and organize. They tie us down. The biggest constraint to moving for some of us is the burden of taking all of our stuff with us.

The things we own trap us. I recently had lunch with a couple who’d been ranching for about 10 years. They both worked off-farm to make ends meet. Over the last several years they’d bought a small place, secured several leases, and built up a herd of a couple hundred cows. But now, with a young family, significant debt and the off-farm jobs, they seemed stuck.

After subtracting the liabilities from their “assets” their net worth came to $1,300,000. On the back of a napkin I wrote them a “check” for $1.3 million and asked them, “If you had nothing but this check and the clothes on your back, and still wanted to achieve your dream, would you use this money to recreate the situation you are in? If not, how would you deploy this money to accelerate progress toward your dream?”

Their expression changed almost immediately. While they’d made progress over the last 10 years, the business they created was going to make it difficult if not impossible to achieve their dream.  Rather than a stepping stone, their operation had become an obstacle to further progress. They set out to use the wealth they’d created to change their course.

I went through the identical exercise with another couple whose net worth was closer to $3 million. When I asked if they would recreate the situation they were in, they immediately and in unison said, “No.” But, when I met with them again a year later, they hadn’t changed anything and resigned themselves to “staying the course.” Rather than using the assets they owned to create the lives they dreamed of, they were owned by their assets, which they used as an excuse to stay stuck. Chuck Palahniuk, author of Fight Club, described it perfectly when he wrote, “The things you own end up owning you. It’s only after you lose everything that you’re free to do anything.”

Setting Goals – Making Plans

Many of us have been caught up in discussions on social media which sometimes turn into nasty mud flinging and other nonsense.  Religious issues with many gurus often offers answers which are confusing and double-minded at best.  Livestock grazing, soil regeneration (regenerative is the goal; sustainable is out, and rightly so, since many of us have denigrated soil resources; sustaining that is ridiculous), wildlife enhancement, water quality, breed of cattle (or other livestock) are promoted with such fervor and worship to qualify as religions.

Yet, the reality of our fallen world and its natural processes, is so complex, that one size fits all does not work.  In the words of my friend Jim Gerrish, “it depends.”  And indeed it does.  Sure, there are some principles, ideas, and theories which are basic and we can learn from these.  However, the key must be to identify our own goals, resources, restrictions, and, as Allan Nation coined, ‘unfair advantages.’

You can search and find a myriad of experts ready to guide you on goal setting.  Read through them, many will help fertilize your own thoughts.   Here are a few thoughts to get you started.

  • Goals will involve family and friends- you don’t live in a bubble – be mindful and consider if your goals will push loved ones away.
  • Goals should consider the future – remember, you won’t always be 25 years old.  Work hard now,  but move into more investments.
  • Goals should include those things you want to do.  You may become successful not doing this, but there may be limited satisfaction.
  • Goals should be written down and in a place you can reference them.
  • Goals should be flexible – we cannot control the world – sometimes shifting a goal is necessary to be relevant.

Grazing livestock management schemes are confusing and challenging – like a lot of fields (excuse the pun).  When you throw in that one guru says do this and another says do the opposite, how is a newcomer to make decisions?  It is tough, for sure, but read a lot, go to a few conferences by tried and true teachers, for example  guys and gals who are or have been graziers themselves.  Networking with other producers will really help, but avoid meaningless quarrels.

Just like knowing the difference between economic (is the endeavor worth doing?) and financial (can i afford to do it?) decisions, knowing the difference between goal setting and planning is essential.  You may have great goals, but can actual plans be made to reach the goals?  And beyond that, you must ask yourself, am i motivated enough to see it through?  Don’t start a task if you don’t count the cost in advance.  These costs are beyond money – they include relationships which may be lost, declining health, spiritual or mental stress.

Change is inevitable, goals change, plans change, plans change because the goals change, goals change because of many, many factors, including age, time, priorities.  Don’t get bogged down with thinking you cannot change goals or plans, but keeping meaningful, timely, and accurate records is a must!

Happy Planning!

tauna