It is easy to see why most people are so bad at managing their money. As Robert Kiyosaki so clearly puts it on his books, the ability to manage money is not learnt at school but it is something taught within your household. For this reason it becomes evident why poor people continue to be poor and why rich people become richer. When you learn from your family how to handle money, the actual financial education of your family will play a vital role in defining how well you will deal with your future wealth. I don’t come from a rich family and I had to self-educate myself financially in such a way that I battled with my family and finally achieved to change their financial mentality. Today I want to write an article about one of the most important aspects of financial intelligence which is the ability to distinguish between assets and liabilities and how this simple concept can absolutely transform a person’s financial situation.

Let us think for a moment about the way in which we build our financial lives. Most of us were educated to get a good education, then get a job, then get a house, a family, a car and repeat the process with our children. We were taught that a better education would give us a better job and that a better job would give us better financial education and therefore a better life. However, they failed to tell us about assets and liabilities. Sadly enough, one of the reasons why most people fail to evolve financially is their lack of an asset/liability based financial education.

If you examine the way in which we were taught to make money, most of us are doomed to have only one asset (which is something that produces money), in this case our jobs while our liabilities (things that consume money) are multiple and grow as our lives evolve. First we have the house, then the car, then the children, etc, the amount of money we have to put forward evolves while our potential to earn becomes limited to what our time at work (whose pay is determined by our experience and education) can provide. Around this model we are definitely doomed to become work-slaves as our income becomes tied to our only asset which needs to feed our many liabilities. This is what many people would call “the rat race”.

How do the rich think ? In the totally opposite way. The idea is to have as little liabilities as possible while the assets are increased as you grow older. As you progress in life you work towards the building of assets and therefore your ability to produce money increases as time evolves and – in the end – your assets always exceed your liabilities by a large amount. When you are around the middle of your life you are enjoying a stress, work-free life provided by your assets while your poor counter-part is fighting with his mortgage and putting the kids through their college education.

Definitely the root of the difference between the mindset of the poor and the rich is the difference between the focus in assets and liabilities.  Rich people understand that the key to financial success is asset production while “poor” people do not understand and do not put in practice the idea of continuous asset creation. If you want to improve your financial intelligence then you should become an asset-oriented person which is the most intelligent way to produce money.

What you need to do is to change your spending priorities from liability to asset expenses and this – in the long term- will provide you with financial freedom. If you have a job you should assign some free time to the development of assets and – once you have some assets – quit your job and dedicate yourself to the production of these valuable possessions. Since assets produce money without you working you will be able to start a work-free life as soon as you amass a large enough quantity of cash producing instruments.

Of course, there are many kinds of assets and the journey towards asset production is not simple but the largest improvement you can make to your financial intelligence right now is to understand that your focus should be on the production of assets and that time and money are most efficiently dedicated to the production of money making entities rather than money-consuming or work activities. Within the next few months I will probably write several articles about asset production and how you can begin your journey towards financial freedom but today the important thing you need to understand is that a mindset change is required. Produce things that produce money and your worries about money will be over.