What Is the Difference Between Assets and Liabilities?
Assets are pluses, and liabilities are minuses!
- An asset is an item or investment that you own that you can sell for money.
- A liability is a financial obligation that is payable in the future.
- Understanding the upside and downside potential of your assets and liabilities is central to managing your money well and building a better and brighter financial future.
What Are Assets?
Assets are items or investments that you own and can be exchanged or sold for money.
- These can include physical assets (i.e. real-life physical items), for example, your house (the mortgage, if any, will appear below as a liability), jewellery or vehicles. Make sure you use current market or resale prices rather than what you paid for them (just rough estimates are acceptable - you can check online for cars and other items. For your house, just ask a property agent)
- They can also include paper assets (i.e. non-physical items that exist online or on paper). Examples include stocks, bank and investment account balances and intellectual property (e.g. trademarks, copyrights or patents). Intellectual properties are intangible legal items such as your ideas. They are registered with an office and protected from copying without your approval.
What Are Liabilities?
A liability is something, usually money or a loan, that you owe to someone, such as a bank. Examples of liabilities include:
- Student loans: Money you borrowed to pay for your school fees, usually for university
- Credit card debt: Money you spent with your credit card. Imagine this as money borrowed from a bank to pay for your monthly expenditures. Credit card debt is repaid at the end of each billing cycle.
- Housing mortgage: A loan taken out from the bank to pay for a house, to be repaid every month with interest (i.e. money paid to the bank in return for the bank lending money needed to buy the house initially). Note that when you buy a home, it is your asset. However, the portion of it that you have not paid down and have to repay with the bank loan is considered the liability portion of your house.
- Car loan: A loan taken from a bank to finance the purchase of your car.
- Taxes: Charges that you owe the government that you haven't yet paid
Those are financial liabilities, but you also have obligations that you need to consider in real life. Even if they do not appear on an official statement, they are just as important! Obligations could include your bright (but not ‘scholarship-bright’) kid's overseas university fees, contributions to your parents' mortgage or retirement needs.
Assets vs Liabilities: It’s All About Balance (Sheets)
A personal balance sheet is a snapshot of your wealth at a specific moment in time. It summarises your assets versus liabilities, giving you your net worth (assets minus liabilities).
Here are some steps to take to assess your balance:
- Know what your assets and liabilities are
- Lay them out clearly on a balance sheet
- Check it twice a year
- If your net worth is not increasing each time you look…
Target the problem areas and take appropriate action!
You can increase your net worth by decreasing your liabilities, increasing your assets, or doing both!
ASSETS vs LIABILITIES. COMPLETED. ✅