Do you know the difference between assets and liabilities? Or, to rephrase, do you know the difference in how you should view them while building wealth?
For most people, assets are those THINGS that could become money one day. This can include items like your house, your car, or jewelry.
For most people, liabilities are those THINGS that you’re still paying for. This can include things like credit card debt and student loans.
But when accumulating wealth – and really you can view these terms in this way for most of your life – assets bring in money.
Liabilities take away money.
How does that change your financial outlook?
The home is no longer an asset because it’s taking away money every month. If you sell for a profit, then you’ve turned it into an asset.
The car is no longer an asset because it’s taking away money, while you pay back the loan. When you sell, then you’ve turned it into an asset (although not a very good one).
The jewelry is no longer an asset because it doesn’t make a dime while it sits, hidden away in your room. If you decide to sell it, then you’ve turned it into an asset.
By this definition, your financial picture may look far more ominous than you originally thought. It’s why you feel overextended when you bought the large house. It’s why you feel tight on cash after paying for the BMW. It’s why you’re scared to wear the jewelry at night. These are liabilities, until they’re sold.
The solution? Finding things that bring in money and reducing the things that cost it.
It’s one of the few tried and true ways to ensure your wealth accrues.