What is an asset?
An asset is an item of property owned by a person or a company which has financial value and can be converted to cash. Moreover, an asset can increase it’s financial value over time and can generate income.
What is a liability?
A liability is the opposite of an asset, it represents the obligation to pay for an item with a monetary value. It can be anything when you have an obligation to pay, such as a loan, a mortgage, an accrued expense or a car payment.
Your home is an asset or a liability?
I like to pick this example because it’s more complicated than you think. You may wonder If your home is an asset or a liability. After all, I’ve added the mortgage to the list of liabilities.
This is not as simple as you may think, by the industry’s standard your home is an asset only if it’s generating income, else, it’s a liability. Here it gets a little more complicated, if your home appreciates or in case you rent it, then it’s indeed an asset, otherwise you are just paying the mortgage and other utilities and what you have is a liability.
If you want to get rich you need to learn how to invest like the wealthy persons. The wealthy person is someone who accumulates more assets in time and lowers the liabilities.
However, in our modern society, consumption is what is driving the current economies and it won’t stop soon. We have so many options to buy more and more useless stuff which is actually a liability for us. Try to change yourself, don’t be that person who only accumulates liabilities and they can never improve their way of life.
Assets and liabilities
Having assets is important, your net worth will increase in time without you having to work more. It’s wonderful to take advantage of your hard earned money and to invest them into long lasting assets.
In case you wonder how to track if you are doing a good job when it comes to assets, then we can get to the next chapter.
Think of your assets now and of your liabilities, put them together on a piece of paper or everywhere you want. The next step is to calculate the sum of assets minus the sum of liabilities, this is known as equity.
If you have a positive number, that means you’re ok and you did a good job so far. If you have a negative number, this means that you need to stop spending on useless things and to focus on getting your equity into the positive area.
We will get into more details in the future posts with more subjects on the topic of assets and liabilities, to make sure that you get the point of having them.
One thing is for sure, in the long run, you want to accumulate as many assets as you can.