I’ll bet my money on the fact that many of us, even the supposedly-literate folks, still confuse these two words: What is an asset; what is a liability.
After years of financial academics, I got to understand these two terms better than I know the palms of my hands after I read and reread Michael Kiyosaki’s “Rich Dad, Poor Dad” book a couple of years back. According to Mr. Kiyosaki, an asset should bring positive cash flows into your pockets. By contrary, anything that takes money out of your pockets is a liability. That is the bottom line.
Looking at this from different angles, I would like to break down some of the things we acquire everyday without knowing whether they are assets or liabilities. I’ll help you decide whether that nice luxury car you are driving is an assets or a liability. Don’t get me wrong if you buy a commercial vehicle, you will be paying some money out of your pocket such as insurance, maintenance etc. But in order for this vehicle to be an asset, it will have to bring in more revenues than what is spent to keep it on the road; basically the balance sheet will have to be a net positive, otherwise get rid of it, you are throwing money in the pit.
There are some good assets; these are income and capital gains producing assets such as stocks, bonds, promissory notes, rental properties, etc.
Neutral assets include appreciating assets such as your home, gold, artwork, antiques, lands, and collectibles. I’d say these are neutral because you never know if the appreciation in value will beat inflation and the cost of upkeep.
Neutral liabilities are depreciating assets like your TV, furniture, and other personal properties. These things are just sitting around; their value is depreciating as they get old. They are basically leaking money.
Worse liabilities are income consuming assets like your luxury car, golf membership, etc. These things need a monthly cash infusion to stay functional and they are draining your pockets.
Many of us need a car to get functional, go to work and run other errands but be smart with this; you shouldn’t own an expensive luxury car unless you are already wealthy.
Acquire more and more assets. Get rid of unnecessary liabilities. Understand the difference between what is that you want, and what is that you need. You sure will be wealthy in a long haul. It’s a matter of time.
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