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.”
Listen to New England Executive Link member, Pat McNiff, explain the cost of keeping assets and the process they used to determine what they needed to keep and what to discard or sell.
Smart farmers will survive the challenges that arise in 2016. Just as they’ve done in the past, they’ll reassess their spending and recognize cash is king. I also recommend the following:
Understand true cost of production. Account for every dollar. It’s how you’ll quantify whether you’re headed for profit, loss, or breakeven. Don’t overlook your true living expenses, including what you set aside for college and retirement. “Tis the year for living frugally.
Scrutinize every line item in your budget. It’s the only way you can stop haemorrhaging cash and become leaner. Is there a way to cut your overall costs? I challenge you to cut all expenses by 1%. It might seem small, but I’ve witnessed this exercise lead to six-figure savings. Question input costs and negotiate with suppliers.
Be sure to liquidate all non-productive assets. You can generate thousands of dollars by selling losers.
Stay in contact with your lender. They realise down cycles occur. The last thing you want to do in tough times is cut them off.
My comments: Just because an asset is no longer working in your operation, doesn’t necessarily mean it’s a ‘loser’ for everyone. Sometimes our goals change and someone else needs exactly what we no longer need. Of course, if the asset is junk, be sure to sell it that way.