Original Post on the blog: https://www.themoneylifejuggle.com/blog/assets-vs-liabilities
In order to be financially literate you have to understand the difference between Assets and Liabilities. Understanding the difference will help you gain financial freedom. Failure to understand this will keep you in the rat race forever!
If you have ever read 'Rich Dad, Poor Dad' by Robert Kiyosaki then you may be familiar with this concept, since he repeatedly tries to educate people on the differences. If you haven't read the book then i am going to give you a breakdown of the concept in this post.
Lets dive in!
WHAT IS AN ASSET?
An asset is something that puts money IN your pocket. It is something which generates cash flow for you. If i owned a property and rented it out then that can be seen as an asset because it is generating money for me. It is a bit of a misconception that your home is an asset - it isn't. Your home takes money away from you and doesn't produce money for you. Of course everyone sees a home as an 'asset' because you live in it, however, you pay to live in it. That isn't an asset.
Think of an asset as something you own which produces income for you.
Some Examples:
Rental properties
Office space you rent out.
Stocks and bonds which pay dividends.
Land, which can be rented out, sold, farmed for profit etc.
A business you are invested in which generates cash flow for you.
WHAT IS A LIABILITY?
A liability is something which takes money OUT of your pocket. A liability costs you money. This is why your home can be seen as a liability; because it takes money away from you.
There are many areas of life that can been seen as a liability, however, you can turn these liabilities into assets, for example, your college degree may be a liability that you turn into an asset if you land that specific skill based high paying job. I do not advocate for you to go to college, instead you should focus on ASSETS and Cash Flow.
Sure, college and a good job will give you that pay check cushion but it will teach you nothing about creating positive cash flow assets. You are probably more likely to settle into a job, pay extortionate amounts of tax and work for the next 30-40 years to make someone else rich. If the normal job route suits you then you need to focus on creating assets for yourself while you work that job. You should focus on making just as much money outside of your job as you do in it so that you are never dependent on that one pay check.
Examples of liabilities:
Your Home
Your Car
Your Kids (sorry but they are very expensive and certain take money out your pocket!)
Your Boat / Bike / Quad / 'insert expensive thing which costs you money'
Your Pets
HOW CAN YOU TURN LIABILITIES INTO ASSETS?
There are many areas in life where you can leverage your liabilities and turn them into assets. The idea is to try take something which costs you money and have it produce cash flow for you.
If you own a car (liability) you could drive for Uber or Lyft in your spare time to turn the car into an Asset. You could even rent out your car or spare car if you don't use it very often.
If you live in a house (liability) you could start renting rooms out or even move out of the house and rent it out to turn that liability into an Asset. Of course you need somewhere to live but doing research into your local area, it may be financially smarter to move out and rent or buy a smaller place but rent out your home. This could in turn cover your mortgage payments and generate you a small bit of cash flow. Research is needed here.
Rent out your holiday home when you aren't using it.
Live in a busy city? Rent out space. You could rent out your Garage or even your driveway / parking spot if you don't use it.
Have a dog? Run a little dog walking business and walk other dogs when you walk your own. Why not earn money doing something you would be doing anyway? Or in other words, turning your dog from a liability into an asset.
Take a look at your life and begin categorizing things into assets and liabilities. Once you have done this you can formulate a plan to see where it is possible for you to transfer your liabilities into assets. Something which costs you money can be generating you money, or at the very least; costing you less money.
What experiences do you have with assets and liabilities? How are you shifting those liabilities to assets?
Let us know in the comments!
this is a great post, and many people really need to grasp these concepts. passive income is the best asset BTW!
For sure!! But work is needed in order to create those passive income streams.
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