Some Thoughts on Assets, Liabilities, and “Free” Spending

Right at the start of my professional career, an old friend of mine sat down with me and gave me some advice that I didn’t pay much attention to at the time, to my regret. I thought enough about it to jot it down in my journal a couple times during the late summer of 2002, but I didn’t really pick up on what he was saying.

This friend of mine told me that there are two things you can spend your money on. You either spend your money on assets, which he defined as things that bring a return on that money, or you spend it on liabilities, which he defined as things that don’t bring a return on that money.

Liabilities, he told me, aren’t necessarily useless. A lot of a person’s living expenses are liabilities – food and clothing are both liabilities because they don’t bring a return on the money you spend.

What’s an asset, then? A dollar in a savings account is an asset. If you put a dollar in there and wait a year, you’ll withdraw more than a dollar. Anything that you buy that has the serious potential to be sold at a profit is an asset. I would consider items that contribute directly to bolstering your resume in your career path to be assets, too, so I would consider a degree or a certification to be an asset because it has a high likelihood of returning income to you. Anything that you buy that pays you any sort of regular or semi-regular income is an asset.

His advice was to think seriously about assets and liabilities when I was spending my discretionary money and that I should spend at least some of my discretionary income on assets.

Here’s the thing: most of what we consider to be “fun” spending is spent on liabilities. Sure, an entertainment item might put a smile on our face, but if we were to sell it, we are almost always locking in a pretty steep loss. Things that are consumable, like alcohol or chocolate or a date night, completely disappears. Those things are all liabilities.

I don’t consider buying something as a pure asset to be “fun.” I don’t get enjoyment out of watching my net worth grow (for a while, I did, but that phase passed) – I get security and peace of mind, but not personal pleasure.

Of course, there are a few ways to spend money on assets that are actually enjoyable. For example, high-end collectibles that retain value can be deeply enjoyable while also retaining value. I have a passion for vintage baseball cards – cards from before World War II, mostly. Let’s say I were to continue trying to build my 1933 Goudey Gum baseball card set by buying a PSA-certified Danny MacFayden, #156 in the set. That would be an asset purchase, because I would expect the card to hold its value and likely gain a little over time, but it would also provide me some deep personal enjoyment. Many collectibles fall into this category – coins, stamps, trading cards, comic books, art, and so on.

This topic has really stirred my thoughts lately as I’ve come to the realization that the vast majority of things that bring personal enjoyment to my life are free. I allow myself a small amount to spend freely each month, but that’s mostly spent on items that just bolster what I already have – a new board game, for example, or a new book. I already have plenty of those things.

Why not take that money, save it up, and use it for an asset that also brings me personal enjoyment? Instead of buying more frivolous items in the moment, wouldn’t it make sense to save up and buy that Danny MacFayden (or something similar)? That way, not only do I have an item that brings me personal enjoyment, I’m also purchasing an asset that would be reasonably expected to retain value.

For that matter, if I have money left over after a month, why not just save it for the future? I allot myself a certain amount each month – and I put aside some of it for Gencon, which is my big annual splurge – but, most months, I don’t spend all of it. Often, there’s a temptation to spend it because I have it, so I’ll sometimes buy things that I only vaguely want just because I can.

After reflecting on the idea of assets and liabilities, it makes more sense for me to just invest that unspent money in something simple, like a savings account, and eventually use it to buy other “personal enjoyment” assets. If I have $20 left in my “free spending” money at the end of a month, I’ll just stick it in savings until I have a few hundred with which to add to my Goudey Gum baseball card set or some other similar collectible.

Are there any ways that you could turn your “free” spending into things that build value instead of things that lose value? Why not save up and buy something that will retain its value instead of spending it on little frivolous things that will just lose value?

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