I think there is a misconception behind what an asset is and what a liability is? The truth behind assets and liabilities is that one puts money in your pocket while the other takes away money. If you question this monetary foundation then please reevaluate the stance on how to distinguish both of these financial terms.
If you can early on capture the real essence of the assets and liabilities game you will succeed with money and possibly have the freedom from worrying about money. The real conundrum that can be simply solved is to ask yourself before a purchase will this put money in my pocket or take away. That shiny new car might seem to many as an asset, but it is really a liability. Why you may ask because you then have to fork over thousands of dollars per year now after owning it that you didn’t have to before owning it. Hence your cash flow is now affected negatively. The costs include insurance, car payments, gasoline costs, maintenance costs. Before you signed on the purchase order dotted line, you never had to worry about having the money for the newly found car costs.
How about a house is that an asset or a liability? Well if you are using it for personal use then it is a liability until you sell it, then it becomes an asset. The house is a constant drain on cash flow from day one. The most common costs for a homeowner are mortgage payments, taxes, maintenance, utilities, etc. The house is the biggest expense somebody can ever have on a monthly basis. It can set you back up to the tune of 50% + when compared to income. The real dread many new homeowners walk into without realizing, is the house poor syndrome. For many the house they live in, will never be an asset because many individuals have fallen in love with their place of residence and could not bear to let go of the property. The same kind of thinking goes for parents who desire to leave their kids with the residence they grew up in so raising future generations in that home can live on for generation after generation.
Definition of a liability: legal responsibility for something, especially costs or damages, something that holds somebody back or causes trouble, all debts and other financial obligations that appear on a balance sheet
Definition of a liability 2: An obligation that legally binds an individual or company to settle a debt, a hindrance on cash flow.
Definition of assets: something that is useful and contributes to the success of something, property to which a value can be assigned, an economic resource, a tangible or intangible thing that is capable of producing value for the owner.
The Truth behind Assets and Liabilities
Assets:
Cash, CD’s, T-Bills
Mutual Funds
Bonds & Stocks
Trademarks, Patents, Copyrights (If producing money)
Businesses (If generating money)
Houses & Rental property (If generating positive cash flow)
Liabilities:
Bills, Debt, Obligations
Cars (Until Sold)
Houses (Until Sold)
Business (if not cash flow positive)
Now after confusing some of you behind the right way to analyze assets and liabilities will you rethink future purchases for your benefit? If you first concentrate on assets when you are young and not on the latter you will be in solid financial grounding. Why because those assets will be of use in the present and going forward to build wealth. I once came across a large amount of money when I was in my early 20’s and if I remember correctly I used the majority of it to pay for my education. I cash flowed most of my bachelor’s degree. If I were not in school I would have either wasted it on useless stuff or I could have invested it in some assets. Before you waste resources think of what those resources can help you achieve in the future. The end result you want to come to fruition is to have a sustainable growing positive cash flow year after year.
Comment if you see the truth behind Assets and liabilities?
Rich Uncle EL
