As important as it is to your financial health, 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 you buy a home, that home is a liability because unless you buy it with cash, the mortgage is an expense which is taking money out of your pocket.

Even once the mortgage is paid off it’s still technically a liability because you have to pay for utilities, maintenance, repairs, etc. But, once you sell the home (assuming that you sell it for more than you purchased it for), then it becomes an asset. So the concept of owning a home as being an asset is one thing, but the reality is something else.

“Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.” – Robert Kiyosaki

An investment property on the other hand 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. So, ultimately it is an asset, but it can easily and quickly become a liability.

Putting money in your pocket or taking money out of your pocket, that’s the simple “litmus test” you can use toward anything you spend your money on, whether it’s a car, boat, house or whatever! Assets and liabilities…..know, understand and recognize the difference and you’ll be well on your way to financial freedom!

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