{"id":8726,"date":"2020-05-22T16:13:37","date_gmt":"2020-05-22T14:13:37","guid":{"rendered":"https:\/\/www.smolio.ch\/wissen\/how-assets-and-liabilities-affect-your-financial-independence\/"},"modified":"2024-09-17T08:35:18","modified_gmt":"2024-09-17T06:35:18","slug":"how-assets-and-liabilities-affect-your-financial-independence","status":"publish","type":"post","link":"https:\/\/www.smolio.ch\/en\/wissen\/how-assets-and-liabilities-affect-your-financial-independence\/","title":{"rendered":"How assets and liabilities affect your financial independence"},"content":{"rendered":"Lesedauer<\/span> 5<\/span> Minuten<\/span><\/span>\n

“Wow, great piece! That must have cost you a fortune?”\nWell, just because something costs a lot doesn’t mean it’s a fortune.\nIt’s not just the post-corona shopping queues at luxury stores in Zurich that show that many people don’t know the difference between assets and liabilities.\nWe show the difference and why you need to accumulate assets, not liabilities, to become financially independent. <\/p>\n\n\n\n

(5 minutes reading time)<\/h5>\n\n

Onslaught<\/a> at the Louis Vuitton store on Zurich’s Bahnhofstrasse in mid-May, shortly after the coronavirus measures were eased. A long queue forms outside the store. A young man talks about his motivation: “We need to get rid of some money, more than 2,000 francs.” He wants to buy shoes, a bag and a belt. Another customer says she is there because of her friend: “It’s her birthday tomorrow and she wants to buy a bag. She also has one that needs to be repaired.” Two examples that also show that many people don’t know the difference between assets and liabilities. <\/p>\n\n

Six out of ten Swiss employees are financially unstable<\/h2>\n\n

A recent study<\/a> shows that only 40% of Swiss employees have their spending well under control and do not have to live paycheck to paycheck thanks to their savings (green category).\nAlthough 20% have savings, they struggle to control their spending (orange category).\nThe remaining 40% live paycheck to paycheck and many regularly overspend (purple and red categories).\nThese mainly include millennials (i.e. people born in the early 1980s to late 1990s), recently divorced or sick people.\nIt is to be expected that the financial situation will continue to worsen as a result of the coronavirus pandemic. <\/p>\n\n

Financial stability of Swiss employees in 2020<\/h5>\n\n
\"financially-unstable-swiss-employees\"
Source: Smolio, Global Benefits Attitudes Survey 2019\/2020 by Willis Towers Watson<\/figcaption><\/figure><\/div>\n\n

Financial instability also has a negative effect on other areas of life: almost a third report this.\nIn contrast to financially stable employees, those who live from paycheck to paycheck and have no savings are sick<\/a> 8 1\/2 more<\/a> days per year in Switzerland, enjoy their work only half as much and have four times more stress, anxiety or depression.\nTime to get out of this! <\/p>\n\n

Assets and liabilities differ<\/h2>\n\n

One possible reason for financial instability is a lack of understanding of the difference between assets and liabilities.<\/p>\n

Difference between assets and liabilities<\/h5>\n\n\n\n\n\n\n\n\n\n
Assets<\/th>\nObligations (liabilities)<\/th>\n<\/tr>\n<\/thead>\n
are values that earn<\/strong> you money<\/td>\nare something that costs<\/strong> you money<\/td>\n<\/tr>\n
ensure an inflow of funds <\/strong>to you<\/td>\nensure an outflow of funds <\/strong>from you<\/td>\n<\/tr>\n
create additional income <\/strong>for you<\/td>\ntake further income<\/strong> out of your<\/strong> pocket; not only to buy them, but also to receive them afterwards<\/td>\n<\/tr>\n
increase <\/strong>in value over time<\/td>\nlose <\/strong>value over time<\/td>\n<\/tr>\n
e.g. shares, bonds, rented real estate<\/td>\ne.g. owner-occupied real estate, cars, consumer goods such as smartphones, clothing, credit cards and consumer loans, <\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

The value of assets increases more and more over time due to the compound interest effect.\nYour FI engine runs faster and faster.\nOn the other hand, the value of purchased liabilities decreases over time: your house loses value continuously without maintenance, renovation and care, your car is worth a third less as soon as you drive it off the dealer’s lot, your cell phone is unsaleable after two years.\nContrary to popular belief, cars are not assets, but commodities with a rapidly declining current value and you won’t be able to pay any bills from your property next month. <\/p>\n\n

What makes you financially successful<\/h2>\n\n

Virtually everyone receives income every month, usually in return for working hours (wage income as an employee or self-employed person) or as a transfer payment (e.g. in the event of unemployment). <\/p>\n\n

Financially successful people use their income first to buy assets and only then for necessary expenses.\nIn contrast, less financially successful people spend their income on things first.\nThey often accumulate debts or obligations for the future with their consumption.\nTake the Louis Vuitton bag as an example: not only does it cost a fortune and is not an asset, but it also causes follow-up costs when it is due for repair.\nAnd we hope that the young man with the CHF 2,000 credit card belongs to the green category. <\/p>\n\n

How your cash flow develops on the way to financial independence<\/h2>\n\n

If you want to improve your financial situation, your cash flow cycle will change on the way to financial independence.\nThe cycle describes how you generate income to finance your lifestyle. <\/p>\n\n

In level 1<\/strong>, you only live off your salary income.\nYou need all of this to finance your consumption.\nA simple cycle: work, spend money.\nYou have no assets or liabilities. <\/p>\n\n

In stage 2 <\/strong>, you start to finance your consumer wishes.\nThis may be through an overdraft on your personal account or credit card, a consumer loan, a leased car or a fancy apartment with a fat mortgage.\nYou need your earned income to service the obligations you have entered into for consumption.\nThe cycle consists of working, incurring debt and consuming.\nStrictly speaking, there is still a small hole in the cycle: others, e.g. banks, take their share of the debt and live off the fact that you are in debt. <\/p>\n\n

Cash flow cycle stages 1 and 2 on the road to financial independence<\/h5>\n\n
\"assets-and-liabilities\"<\/figure><\/div>\n\n

In stage 3 <\/strong>, you take control of your personal finances.\nYou first use your wage income to acquire assets.\nYou are motivated by the urge to escape the “money versus time” equation and build up an income independent of your work input.\nYou use the rest of your wages to buy what you need or what is really important to you.\nThe cycle then looks like this: work, invest, consume.\nAs soon as you own assets, they also bring you additional income that you can use to finance your lifestyle.\nYou rely on assets and liabilities are part of your past. <\/p>\n\n

Cash flow cycle stages 3, 4 and 5 on the way to financial independence<\/h5>\n\n
\"assets-and-liabilities\"<\/figure><\/div>\n\n

In stage 4 <\/strong>, you generate enough income from assets to finance a good part of your lifestyle.\nHowever, you do not yet have enough or a cushion and are therefore still dependent on additional income from work. <\/p>\n\n

At level 5 <\/strong>, you are financially independent: your assets generate so much income that you can finance 100% of your lifestyle.\nYou can do without income that depends on your working hours.\nInstead, others work for you: <\/p>\n\n

  • Governments or companies pay you interest because you have lent them money by buying their bonds.\nThey have obligations to you. <\/li>
  • or employees work for you in all companies from which you have bought shares and whose profits you collect as dividends. <\/li>
  • or tenants paid you because they live in properties that belong to you.<\/li><\/ul>\n\n

    Please note that you have only reached level 5 when you really generate enough funds from your free assets to finance your current expenses.\nTied assets in an owner-occupied house or pension assets (in AHV, pension fund or pillar 3a) are there, but do not yet provide you with an income stream to finance your everyday life. <\/p>\n\n

    Summary of assets and liabilities<\/h2>\n\n

    The quote from Robert Kiyosaki puts it in a nutshell: “If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.”\nAssets increase in value and bring you income.\nLiabilities decrease in value and take away your income.\nFinancially stable people spend part of their income buying assets.\nPeople with the goal of financial independence maximize this part of their income. <\/p>\n\n