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!

Do You Know This Difference?

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.

“Never depend on single income. Make investments to create a second source.” – Warren Buffett

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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