No matter what our financial situation is, knowing and recognizing the difference between assets and liabilities plays a crucial part for creating wealth in our journey to financial freedom. Acquiring assets, whether we purchase or create them, is not only about how we invest our money, but also how we invest our time. We don’t…and won’t get wealthy working for someone else! We get wealthy in our free time by generating or acquiring assets. For most of us working for someone else is a foundation which we use to create and build our wealth on, but it’s not where our financial freedom will come from. Aside from purchasing and/or creating assets, knowing what a financial liability is, is as equally important. Assets and liabilities are opposing forces in finance and the difference in how we see them will make us or break us!
The difference between assets and liabilities is simply put in this way, an asset is something which generates an income or said differently, puts money in our pocket and a liability is something that is an expense or takes money from our pocket. In order for us to build wealth, we need to focus and concentrate on taking advantage of spending our money on things that will put money in our pocket. When we think of spending money, we need to think of things that will produce an income in return. If all we do is spend money to buy things which increase our expenses and take money from our pocket, then that’s when we just end up broke! By spending our money on getting assets we will continuously increase our income. This will then provide us with more cash to invest on more assets, which in turn will boost our income even further. If we change the way we spend our money by buying assets first, the money generated by our assets can take care of our liabilities. Buy assets before we spend on liabilities…it’s that simple!
Sometimes the difference between assets and liabilities is obvious and sometimes it’s not. What may at first be a liability can become an asset or vise-versa. For example, when we buy a home, that home is a liability because unless we buy it with cash, the mortgage is an expense which is taking money out of our pocket. Even once the mortgage is paid off it’s still technically a liability because we have to pay for utilities, maintenance, repairs, etc. But, once we sell the home (assuming we sell it for more than we purchased it), then it becomes an asset. An investment property can go back and forth as an asset or liability. When it’s rented and producing positive cash flow after all expenses are paid, it’s an asset, but once it becomes vacant and there is no more cash flow, it becomes a liability until a new renter comes in. Putting money in our pocket or taking money out of our pocket, that’s the simple “litmus test” we can use toward anything we spend our money on, whether it’s a car, boat, house or whatever! Assets and liabilities…know, understand and recognize the difference and we’ll be well on our way to financial freedom!
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