Assets vs Liablities? What All You Need To know In 2020
Assets and Liabilities are one of the most common terms that a commerce or finance student hears during their studies. Non-finance people may or may not know about it much. Whether you know it or not, it’s very important that you need to have good knowledge about what are assets and liabilities if you want to live a financially free life. First let’s see the textbook definitions:
Definition of an Asset:
“An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that if will provide a future benefit.”
Definition of a Liability:
“A liability is something a person or company owes, usually a sum of money. They are settled over time through the transfer of economic benefits including money, goods or services.”
Now, before you run away from here after reading this textbook definition, let’s see a very simple definition of assets and liabilities that you will remember throughout your lifetime. Don’t worry if you didn’t understand a single word from the above definitions. Just forget it! The couple of lines below are enough to understand what an assets and liabilites is.
“An asset is anything that puts money in your pocket.”
“A liability is anything that takes money out of your pocket.”
WHY IS IT IMPORTANT FOR YOU?
You might have heard many people say “Your House is your biggest Asset.” Well, that’s completely untrue because we just now looked at the definition of an asset which is something that puts money in your pocket. A house doesn’t put money in your pocket; in fact, it takes money out of your pocket in the form of maintenance bills, electricity bills and other expenses. My point here is not that you shouldn’t buy a house, but simply understanding that you shouldn’t consider your house as an asset. Similarly even your car isn’t your asset because it takes money out of your pocket in the form of paying for petrol, servicing cost, etc. Knowing the difference is really important. If you don’t have proper understanding, you will keep acquiring liabilities and think that you have assets.
This is a quite simple concept but it’s strange to know that despite of its simplicity, people don’t understand this difference between an asset and a liability. This is the only difference between Rich people and Poor people. Poor people think they know everything and consider liabilities as an asset.
Examples of Assets:
Examples of Liabilities:
As you see, your house and your vehicles are liabilities, but that doesn’t mean that you shouldn’t buy them at all. All of us have a dream to buy our own house or to have our own luxurious cars or bikes and we should complete that dream because that is quite satisfying. But the most common mistake people make is that they run behind these liabilities without having any assets which puts them in more debt which they have to keep repaying and thus they can never become financially free. The main lesson to understand is that first put time and effort in acquiring assets so that your assets are bringing you enough money to buy the cars and houses that you want.
Growing an asset is like planting a tree. In the beginning, you have to put good amount of effort watering and nurturing it. But once it becomes big enough, your effort is highly reduced and you will keep getting the fruits for the effort that you had put in the beginning.
This is what the rich people do. We only see their big cars and houses but we don’t see the effort they have put in acquiring assets over the years. They don’t spend anything on luxurious things until their assets are large enough to generate enough cash.
The best part is that almost all the liabilities can be converted into an asset. Consider the example of car. If you don’t use your car too often or it is sitting idle, you can rent it out which will bring you cash every month.
Asset is anything that puts money in your pocket whereas liability is anything that takes money out of your pocket. It’s as simple as that. Never forget this simple difference and work on acquiring assets. It’s a great feeling when your assets are enough to cover all of your expenses so that you live debt-free. There are still many people that don’t know this difference which can be life changing and we should share this knowledge to as many people as possible instead of keeping it to ourselves.
Thanks for reading and as always,
HAVE A WONDERFUL DAY AND KEEP SMILING.