Assets v. Liabilities

Yielding wealth is about more than just earning more and spending less. It’s really about building wealth based on what you understand about how money works. This means that you need to have a solid understanding about the difference between assets and liabilities. Whenever you look at your financial situation, you look at it in terms of assets and liabilities.

Assets

Basically, assets are things you want to have, and liabilities are things you want to limit. Assets are things that create wealth. They grow in value and can provide some sort of return on your investment. A house is often considered an asset (but only if it is appreciating in value). Your investment portfolio is an asset; it grows and yields a return. Even your savings account is an asset, since the interest yielded does provide income (albeit small — sometimes miniscule).

Liabilities

These are items that do not give you anything back in terms of monetary reward. Liabilities take your wealth. This is not the same as things like food. You need food to live. It is not really something you own. Items that are permanent, but that drain money away are liabilities. Sometimes they are necessary. Many people would find life extremely difficult without a car. But it is a liability. You put money into it (and the interest adds up too!), but the car still depreciates in value.

When creating your financial plan, it is important to assess your assets and your liabilities. They key is to manage your cash flow so that your assets are producing much more than your liabilities are draining. And you should try to neutralize your liabilities (by doing such things as paying off the car quickly) as soon as you can.