By Gary, on July 10th, 2011
What is a Liability?
What is an Asset?
How do these affect your wealth?
In finance, a liability is anything that would decrease your net worth and enlarge the expense side of your income/expense statement. Liabilities can be in many forms, but are most often in the form of a loan or a debt. Liabilities could also be alimony or child support from a divorce, insurance premiums on a house or a vehicle, tax burdens, etc. The commonly thought of liability is your credit card balance, where you pay some each month but not enough to pay off the balance. Any loan that you have that sets you up to enjoy your purchase now and pay off the principal with interest over time is a liability. This could be your car loan, your home mortgage, or a small business loan.
Having uncontrolled liabilities can lead to financial disaster: Expenses exceeding Income.
This is Anti-Wealth!
Financial liabilities must be controlled. The expenses created by these liabilities need to be kept to a controllable minimum.
In finance, an asset is generally anything that has the potential to increase your net worth and the income side of your income/expense statement.
Why did it say “potential”?
Well assets are what?
- Successful companies
- Real estate that has a steady positive cash flow
- Stocks and bonds that appreciate and have good dividends
- Investments that have positive income and low taxes
- Network marketing businesses that have great income producing associates
- Books or music that sells a lot of copies and has a good royalty payment structure
- You can probably think of others
As you can see, each asset has a qualifier. This means that you have to select the asset wisely and you have to cultivate it so that it will grow and be profitable. In shorter terms: you must control your asset or your asset will turn into a Liability.
Controlled properly, the Asset increases your net worth and your income and continues to do so as long as it is healthy, thus allowing you the freedom to increase assets whenever another good one presents itself.
Having healthy assets builds your wealth.
Having healthy assets can make you wealthy forever.