Asset - a thing of value, especially property, that a person or company owns, which can be used or sold to pay debts.
Liability - a person or thing that causes you a lot of problems or the amount of money that a person or company owes.
While the above definitions are clear enough to be understood, they are not so clear when applied in real life. The definitions alone may not present a complete picture when put through the lens of wealth builders. Hence, I prefer the following definitions of an asset and a liability:
Asset - something that puts money into your pocket.
Liability - something that takes money out of your pocket.
The above definitions of assets and liabilities would help people see things from a different perspective. It becomes easier for anyone to classify what they own into real assets and liabilities. Hence, the house that you live in is a liability. Even if your residential property appreciates in value over the years, the additional value would remain as "paper profit" unless realized by selling the house. However, the same house becomes an asset if you rent it out to enjoy regular rental income, thus putting money into your pocket. Similarly, the car that you bought for your personal use is considered a liability since money will have to come out of your pocket to maintain the vehicle. But if used to produce income, the same car can then be classified as an asset because money would be flowing into your pocket.
Other often termed "assets" such as branded watches, bags, gadgets, furniture and other luxuries for personal use are really liabilities, though accountants would have classify them as assets. This is because these things take money out of your pocket when you buy them. Furthermore, these items would also depreciate in value over time, thus taking some more money out of your pocket!
Is the picture much clearer now? Now that you know the difference between assets and liabilities, set your sight on the ultimate goal of attainingfinancial freedom by accumulating real assets and minimizing your liabilities. Start working at it today!
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