What is the difference between assets and liabilities?

 

It’s a very simple question but when I ask people I’ve gotten some interesting answers, so I ask you what is the difference between assets and liabilities?

First I’m going to give you the textbook answer then I’ll give you my answer which I promise will be more exciting lol.

Assets

According to investopedia.com

1. A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

2. A balance sheet item representing what a firm owns.

Isn’t that exciting! lets take the point of view of the individual. An asset is simply something that’s making you money i.e. a house without a mortgage, a business that operates without you being there and anything else that you own that will not cost you money or depreciate in value (on paper it’s ok).

 

Liabilities

According to investopedia.com

A company’s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.

How does that apply to the ordinary person like you and I?

A liability is simply something that’s costing you money and you’re not getting anything in return for it, your Return on Investment (R.O.I) is Zero. Some examples include the monthly payments you make on your credit cards ( except when you’re using a credit card to pay for an asset that yields enough money to pay for the credit card and puts money in your pocket) , the loan on your mortgage is another one that I get people fired up about because they believe the house they own is an asset. If you still have a mortgage and no equity then you have a liability, that house doesn’t become an asset until you have paid of the mortgage or have some equity in the house and then only the equity part is your asset. You car is a liability, those monthly payments you’re making are going straight to the bank on top of that you have to maintain it    ( oil changes, tires, tune ups, brakes etc…).

Anything that has a monthly payment attached to it or anything that you’ve paid for in cash that’s not giving you a R.O.I is a liability. The good news is that as an entrepreneur/business owner you have the ability to take your liabilities and convert them to assets, these are what we call “business expenses”. I’ll cover more on that at a later date but for now if you can try to focus on purchasing assets first that will fund your liabilities then you’ll never be using your own money to buy anything you’ll be using your profits from your assets to buy everything you need.

A really awesome tool that teaches you the fundamentals of assets and liabilities is the board game Rich Dad Cashflow 101 board game Rich Dad Cashflow 101 board game by Robert Kiyosaki. On a monthly basis we host game night twice a month in our New Jersey office and once a month in our NYC office, to view our schedule of events be sure to visit my events page.