Assets and Liabilities
Reading time: 2-4 minutes (677 words)
Everything that takes money out of your pocket is called a liability. Everything that puts money into your pocket without working for it is called an asset. An asset generates income without the need of being present. You read that right, you can earn money without working for it. That does not mean you don’t have to spend time creating an asset. But once the asset is created, it can potentially make money forever. Most people have almost no assets, only liabilities. They pay their liabilities with income from a day job. Some liability examples:
- Any kind of subscription (TV, Netflix, Amazon,etc).
A day job is not an asset. It generates income but you simply exchange free time for money. Once you stop exchanging free time for money the income will stop right away. Most people do have one asset and they probably don’t realise it. What is the one asset most people (in western countries) have? A bank account that generates interest. Most banks give you interest for stalling your money with them. Although right now (2021) the interest rates are really low or non-existing. Update 2022: Inflation is reaching almost 10%. Interest rates are already going up. Expect to get some positive rates on your savings account in 2022.
In 2021 you get about 0.1% interest over the total amount of dollars or euros you have in your account. Your money in your bank account is generating money automatically each year. And there is not a single thing you need to do besides making sure you have money in your account. Other assets can be:
- Website (blog or selling a product/service)
- Stocks / crypto (dividends)
Notice how a mortgage can be a liability and asset at the same time. Your house (mortgage) is financially speaking a liability. Unless you start renting out some rooms. If you buy a house with the purpose of renting it to someone else you created an asset. Although you have to pay the mortgage, the income of the rent surpasses the costs of the mortgage making it an asset. Your car can also become an asset if you rent it to someone else. Or use it in other ways to make money like becomming a Uber driver. A subscription to a service that provides entertainment (Netflix) won't get you any profits. But subscriptions to financial platforms might help you create an asset.
Do note that although subscriptions are a liability, they can provide you with information about creating assets. While a TV subscription is a liablity, if you only use is to watch the next TV shows It can become an asset:
- The profit
- Shark Tank
- Undercover Billionaire
Many companies are paying dividends. Dividend is money paid by a company (from their profit or reserves) to their shareholders. If you focus on building a portfolio based on companies that pay divideds, you created an asset. Many companies (like Coca Cola) have been paying dividends for several decades. While cryptocurrencies are not based on companies like stocks, they do sometimes have a way to pay dividends known as staking. When you are staking, you are improving and helping the network. As a reward, you'll receive a certain amount of coins.
If you are striving for a healthier financial life, then it’s generally speaking a good idea to stop wasting money on liabilities and start building assets. Before you can start this shift you need to take care of your personal finances and mindset first. If you want to know more about assets and liabilities then Rich dad, Poor dad is a must read. It’s very well written with a great relevant story and may help you make the shift in accumulating assets over liabilities.