Know the difference between an Asset and a Liability.

9 April 2008 Sören Zschoche 61 Comments Getting rich

Many people say their house is the greatest asset they got and also their largest investment. In the most cases their car is the second greatest asset they got and they are really proud of it. But are these thing really assets? Unfortunately I have to say the in most cases they aren´t they are liabilities and the reason for that fact is that they absorb your money like a sponge. For example a car has many extra costs gas, taxes, repairs and so on, also a house needs very much money for energy, repairs to say nothing of the price you have to pay to buy it. So when you want to become rich it´s very important to know the difference between an asset and a liability.

Asset = Money into your pocket

An asset puts money into your pocket, an asset should generate income on a regular basis. The traditional definition of an asset is anything that you own is worth something-that could be “turned into money” if you needed it to be. Look around your room. Is there anything that might be worth something? You probably have more than you think… a computer, a TV, a cell phone? Skis? Your assets also technically include the balance in any bank accounts in your name, or the current value stocks bonds that you have your wallet.

But here´s the catch: While might consider everything of value in your room an “asset” (because you could sell it for decent money on eBay), it´s not really an asset until it is sold. Why? Because it´s not putting any money into your pocket until then. (And then, it´s not longer an asset because it not longer belongs to you!) Same thing goes for cash in your wallet, your cash is not secretly reproducing itself, putting more money into your pocket. But there are places other than your wallet where cash “reproduces itself”- when it´s invested in assets that give you a passive portfolio income. Anything you own that produced passive portfolio income is an asset.

Liabilities = Money out of your pocket

Liabilities are the opposite of assets. Liabilities take money out of your pocket. In fact, a lot of things mentioned above- the TV or computer in your room that that might traditionally be considered “assets”-are actually liabilities right now, because it took money out of your pocket just to get them. And many of them, when converted to cash, would give you back less money than you would pay for them. So just if the value of your house or your car grows more than you pay for it you can call it an asset.

Source: Rich Dad Poor Dad for Teens

61 Comments »

  • Adeyanju Taofeek.O said:

    i need the defination and the different between asset and liability.

  • Momo said:

    how about if you sell your house after 10 years and you earn twice what you have paid for….Asset or liability

  • JCrump said:

    In general any worth while land has more than doubled in price in ten years. So it is a liability because you did’nt get the equivilant amount from selling it?. And also all the money you spent on the house over the 10 year period would turn towards the house being a liability

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  • rashmi parmar said:

    i understood the difference between assets and liablity.Assets specify the money in your pocket and liability is specify the money out in your pocket. but my question is that what should we buy for increase our assets. because anything we buy eg. house, car etc. one day it’s value or price must be get lesser. if we buy a car by taking loan than why is gone into libelity. please guide me how it affect. how intrest rate are decided on taking loan. if we buy any car or house will be it good investment or we are decresing our asset ??

  • Dolly said:

    i’ m somehow confused,i know the definition of both asset and liability but i find it hard for me to recognize each of them as in material things, e.g a house,laptop or a gas cooker, are these assets or liability.

  • Rhemee said:

    If i buy a car,its liability…right?.cos it takes money 4rm my pocket.if i sell the car, it becomes an asset cos it brings money 2 my pocket.if i buy at R 250,000 and sell at R300,000, that’s asset but if i sold it at R200,000, that’s liability.
    I’m i right?

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  • mich said:

    i need the defination and the different between asset and liability.

  • re said:

    nothing is specifying clear picture of asset and liability

  • Sk jahur Md said:

    It is very clear from above discussion that when something belongs to you make your benefit that will be called your asset and when takes take your benefit called as liability.Deppriciation is also one factor to be concidered when you take decission on same topic.

  • santosh said:

    as it is indicated above that an asset is somthing that which put money into you pocket…. like a share or a mutual funds, investments like constantly. on the other side a liability is which makes money to flow out of your pocket.. like an expensive car which needs day to day services and updations to that and an expensive jeweleries etc… now can any body explain me
    how tangible and intangible assets are classified and define them with suitable examples?

  • Vitaly Tennant said:

    An asset is something that puts money into your pocket (job). Liability is something takes money out of your pocket (bills).

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  • meitaron said:

    realy the idea of the two terms has been confusing but now getting ideas on them,
    the given example that a job is an example of the asset since it gives money into the pocket and bills is a liability sice it take away money from the pocket is good for clarification. but how is the issue of buying a house or a car are tghese assets?

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    i understood about above things, now i am need more details and need more things from a growing buisnesman if any one please send me ur reply to my mail id riyasppa@gmail.com

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    A house is liability However, if you don’t own a house to sleep in; it means you’re paying bills for accommodation somewhere in a long run, what do you think?!

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