“To get rich, you have to be making money while you’re asleep.” – David Bailey
Whatever your financial situation is, having the knowledge to recognize the difference between assets and liabilities plays a crucial part for creating wealth in your journey to financial freedom. It’s a basic understanding that you need to have for dealing with your finances. Without it you just end up spending your money haphazardly.
Spending your money to buy liabilities can have long term negative effects on your financial well-being versus spending your money to buy assets. An asset, whether you purchase or create it, is not only about how you invest your money, but how you invest your time is also an asset. You don’t…and you won’t get wealthy working for someone else! You get wealthy in your free time by generating or acquiring assets.
The Simple Difference Between Assets and Liabilities
Working for someone else is a foundation which you can use to create and build your wealth on, but it’s not where your financial freedom will come from. Aside from purchasing and/or creating assets, knowing what is a financial liability is equally as important. Just like ignorance of the law is no excuse for breaking the law. The excuse of ignorance for not knowing what a financial liability is won’t save you from financial ruin.
Assets and liabilities are opposing forces in finance and the difference in how you see them will make you or break you financially. Don’t let thoughtless spending keep you from reaching the financial freedom you deserve. Learn to recognize and understand the difference between an asset and a liability, and take control of your life!
“Never depend on single income. Make investments to create a second source.” – Warren Buffett
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 your pocket. And a liability is something which is an expense or takes money out ofyour pocket. That’s about as simple of an explanation as it gets.
In order for you to build wealth, you need to focus and concentrate on taking advantage of spending your money on things that will put money back in your pocket after you buy them. When you think of spending money, you need to think of things that will produce an income in return. As examples, the most common are stocks/bonds, real estate and business.
If all you do is spend money to buy things which increase your expenses and ultimately take money from your pocket, then that’s when you just end up broke! By spending your money on buying assets you will continuously increase your income. This will then provide you with more cash to invest in more assets, which in turn will boost your income even further.
If you change the way you spend your money by buying assets first, the money generated by your assets can take care of your liabilities. It’s not necessarily as easy as it sounds, but the benefits are worth the effort. Buy assets before you spend on liabilities…it’s worth it!
“Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.” – Robert Kiyosaki
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.
An investment property on the other hand can also 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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