So, since we’re diving more in-depth into our financial journey, we need to come to an understanding of the difference between an asset and a liability. Sometimes, assets can be things that typical investments aren’t. They may look like investments to some, but assets play a huge role in your overall financial foundation. On the other hand, liabilities will look completely different than assets but to the untrained eye they may confuse the two.
Definition
Assets are something that you hold, with the hope that their value will increase over time. Money is a good example of what an asset can be, as the more money you have, the more assets you likely have access to. A good way to define an asset is if it generates more money than you put in.
A liability is something that you pay into and doesn’t necessarily give you the ROI that you are expecting. Liabilities can be a car or even a house; all these things are something that you are paying towards in hopes of potentially eliminating the debt. A good way to classify a liability is if it is taking money from you.
Importance
This one should be a no-brainer, as understanding more and more about financial literacy is more important than many other things that we focus on in our lives. I don’t want you to get the idea that everything is an asset or everything is a liability because that is not true. Once you understand the difference between an asset and a liability, you’ll be able to make informed decisions for yourself and your loved ones.
Misconceptions
I stated this earlier, but there are a lot of common misconceptions about what assets and liabilities are. Some might say that a home is an asset because, in the long term, once you pay off your mortgage, the home will be worth more than when you bought it. However, you have to first pay off a debt in order for that liability to become an asset.
Assets and liabilities are like yin and yang – having one without the other is not always a great thing, but it’s not always a bad thing either. If we want to go a little deeper, there are three categories that you can put the things you buy into. The first category is assets, the second is liabilities, and the third is debt. I like to separate debt from liabilities because a liability can be much worse. I may write another blog touching on this subject.
Liquidity
One thing I don’t want you to get confused about is, just because you have a lot of assets doesn’t mean you have a lot of money. Someone can own a lot of property, and technically, those can be assets to that person, but those assets may not be very liquid, meaning they aren’t easily sold for their true value in cash. So, when you are trying to find a great asset, make sure you understand how liquid that asset is, just in case of emergencies.
Investments or Debts
At the end of the day, you can simply call liabilities, debt, and assets investments. This is only because, in simple terms, they make sense. However, just like regular school work, you always have to understand the background behind why certain things happen before you get the formula. And remember, every asset isn’t an investment, and every liability isn’t debt.
