Difference between asset and liability.

Hey what’s up everyone. Davey Pockets here, man of the financial frontier. Ready to help you increase your financial IQ, increase your net worth and show you how and where to invest.

For today’s topic we are going to talk about the difference between asset and liability.

Understanding the difference between an asset and liability can make a huge impact in your financial future and drastically increase your net worth.

Just a few short years ago I used to believe that I knew the difference between asset and liability. I was getting along just fine financially. However it seemed like the harder I worked the more I stayed about right where I was. I was not increasing my net worth and I did not understand why. I had always been taught that hard work would put me in a better position financially. Once I realized that my hard work was not going towards the right things then I realized why I was not getting ahead.

You see sometimes it is better to work smarter before you work harder. If all of your hard work is going towards buying liabilities instead of assets then you will not get ahead financially!

To begin with let’s start by defining a liability and an asset.

A liability is something that takes money out of your checking account, out of your net worth, and out of your pocket whether you go to work or not.

An asset it’s something that puts money in your checking account, in your net worth, and in your pocket whether you go to work or not.

So is a house in asset?

I used to think that a house is an asset and in some cases it actually can be. However in most cases a primary home is not an asset.

Let’s go back to the definition- does it take money from my pocket or does it put money does it or does it put money in my pocket?

If I am NOT renting out my primary home and I have to pay the bills on it such as taxes, insurance, electricity, water, heating, natural gas, etc. then my house takes money from my pocket every month whether I go to work or not.

Therefore my house is a liability and in terms of wanting to increase my net worth I would want to find the cheapest, most affordable, most low-cost, most cost efficient home that I could find.

The only way my house could be considered an asset is if I rented out some of the rooms and my renters paid enough monthly rent to cover my taxes, insurance, heating, water, gas and all my bills.

Another item I made a huge mistake on was a motor vehicle. Is it an asset or a liability? Once again it can be both. But in my case my red Dodge Ram was taking money from my pocket every month in the form of maintenance, tires, gas, and oil changes whether I worked or not.

The only way for my truck to have been considered an asset would have been if I was renting it out for others to use and the rent I was being paid was putting more money in my pocket than the expenses were costing me.

So once again if you are wanting to increase your net worth it is ideal to have a low price, very cost efficient, and low maintenance vehicle.

So now you may ask what is an asset? If a house and a car are not assets then what are?

An asset can come in many different forms- dividend paying stocks, a mutual fund, a certificate of deposit, a rental home, a business, intellectual property- such as books, CDs, DVDs, an ebook, a blog, etc. These items require a bit of work in the beginning but once they are setup properly they will put money in your pocket over and over again whether you work or not!

Hopefully after reading this you now have a better feel of the difference between asset and liability. If you understand the difference between asset and liability you will have a much higher financial IQ and a lot better chance of increasing your net worth!

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