As a young adult, I would often here different opinions on what qualified as an asset and what was a liability. I realized then that many people really don’t have a clear understanding of the difference. Many understand the general concept, however, fail to properly identify the defining line that separates an asset from a liability. Robert Kiyoski said, “All you have to do to become rich is accumulate assets instead of liabilities.” But how do you become rich, if you don’t understand the difference?
Today I would like to talk a little about both the difference between an asset and an asset type that I refer to as “the best method of saving.”
Why Do People Confuse Liabilities & Assets?
One of the issues with defining the qualities of an asset, is that the definition used by many financial institutions allow for different interpretations. Investopedia describes an asset as, “A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.” Let’s be honest, I can expect something to provide a future benefit, but it doesn’t mean that it will. This is why people purchase liabilities all the time thinking they are buying assets and later finding themselves disappointed and at a loss.
What Is An Asset?
To keep it simple, assets puts money in your pocket while you own it. It has little to do with what it is, but everything to do with what it produces. Assets produce cashflow even when you are asleep, on vacation, relaxing at your house, etc, and are the key to financial freedom and independence.
There are many types of assets that have helped average individuals become wealthy including but not limited to: Real Estate, Online Businesses, Stocks, Foreign Exchange, Multi Level Marketing, and more. Some of these assets require a few thousand dollars to acquire, while others simply require your willingness to build it. You must choose the assets that best suit you and your financial goals.
We will discuss each asset in future blogs, but remember that the true value of an asset is found after you purchase or build it, not when you sell it. Yes, when you sell the asset you receive a big paycheck, however, you no longer receive the passive income that the asset provided. This is another important point because the key to being financially free is to make more passive income than you pay in expenses.
What Is A Liability?
A liability is just the opposite of an asset, a liability takes money out of your pocket. People often say that your home is your biggest asset, but does your home put money in your pocket? I believe your home is a liability. The reason I believe your home is a liability starts with the fact that it does not produce passive income. Sure, it appreciates in value, but while it appreciates, you are constantly pouring more money into the property. That means not only does it not produce cashflow, it costs you taxes, maintenance, upgrades, etc.
The Best Method of Saving
Many people consider gold, silver and other precious metals & jewels to be assets, but I like to look at these as a best method of saving. As mentioned before, assets produce passive income while you own it, but precious metals and jewels only really hold their value over time. Many would say that they appreciate in value over time, and I am not going to argue wether they appreciate in value or if currencies depreciate in value, but the principle is the same. This form of “savings” allows you to turn your cash into a non fluid form that doesn’t lose it’s value. It is always helpful to hold your savings in a non spendable form, but also keeps it’s purchasing power over the course of time.
Many people make the mistake in thinking that cash is an asset. Regrettably, cash over time is a liability. Think about what one dollar was able to purchase in 1940 and what that same dollar can purchase in the 20th century. The power of the dollar has dramatically diminished, however, many people still keep their life savings in a bank’s savings account. The wealthy know better. The wealthy invest their savings into gold, silver and other valuable items that maintain their value and/or appreciate over time.