Has anyone ever told you, “You’re such a huge liability to this company“. Really? Just me? I have to work on myself then. In short a liability is something you are responsible for, something you have an obligation to. Sometimes it’s really easy to see what a liability is, sometimes it’s a little more difficult. An asset is a tricky one too, because a lot of things you might consider assets might be your biggest liabilities. An asset is something that will impact you positively, while a liability will impact you negatively. Seems simple enough right?

Asset:

An asset is something that will provide literal positive value to your life. You might be able to exchange these assets for cash or, they might even be cash. They might provide cash flow, such as rental income or dividends. They might provide future growth potential like a business with projected profits, or a growth stock. Anything can be an asset. Your home, car, clothes, cell-phone, collectables, art, jewelry, etc.

Before you go out and buy all these things, when do they become liabilities?

Liability:

A liability is something you have an obligation to. You have made your future self liable to pay someone back, usually by a loan. Liabilities cost money to repay, usually in the form of interest. Someone is taking a risk lending out that money, so they charge interest to justify that risk. This is why people with higher credit scores get lower interest rates, since the bank or lender is more likely to get paid back. Some common liabilities. Your mortgage, car loan, student loans, financed cell-phone, and credit card debt.

Do you own your assets, or do your assets own you?

Net Worth:

Calculating your net worth is very simple. It’s your (assets – liabilities). For example, your home is worth $100k, and you took a mortgage out for $90k. That makes your net worth $10k. Although this is just a simple example, your total net worth would be calculated by adding all your assets minus all your liabilities.

Asset or Liability?

You can use liabilities to your advantage. This goes back to the talk of good debt vs. bad debt. For example, you have a home with a 4% interest mortgage. Let’s also say you can make 8% investing the money somewhere else. Where would you put your extra money?
You can,

A: Pay back your mortgage company or,
B: Invest the difference.

If you invest the difference you (theoretically) are up 4% on your money. 8% gains minus 4% from the mortgage. This example is the easiest and simplest forms of leverage. Leverage in simple terms is, using borrowed money in hopes of earning more than the interest rate will be. In this example you are taking any extra money that could have gone to pay off the mortgage but instead took the route of earning an extra 4%.

Again if you were realistically in this scenario and had the opportunity to pay off your mortgage, you can! It’s your money, just know you are potentially leaving money on the table. Sometimes you can’t put a price on peace of mind.

I’m going to pay it back, why is it still a liability?
It’s not an asset until it’s completely yours. If you have a financed cell phone you owe $800 on and you sell it for $400, you still owe those $800 and even after paying back the $400 you’re still down $400 and a phone.

Final Notes:

Take a look at your finances, do you own more assets than liabilities? Keep in mind that retirement accounts and savings count as assets! Also don’t feel too bad if you end up negative, sometimes you need to start from somewhere to make the money come in. With proper savings and good money management your assets will be working for you and not the other way around.

Thank you for reading and see you next Sunday,
– Pablo

Sources:

What is an Asset? – Investopedia
Liability: Definition, Types, Example and Assets vs. Liabilities – Investopedia