What are assets and liabilities?
If you ask this question to an audience, some will say that these terms are taken from accounting, while others did not know about their existence at all. Despite its simplicity, explaining these concepts can be difficult for some people. In reality, everything is very simple. All you need to know is that your financial well-being depends on your ability to manage assets and liabilities.
In order for users to understand the true meaning of the terms, we will not try to decipher them using financial definitions. Let’s do something else and make it simple and clear. What are assets and liabilities? Assets are what “produces” money, and liabilities are what takes it away.
What types of assets and liabilities are there?
Assets — capital investments that can:
- generate passive income;
- increase your value over time.
Today, a large number of types of assets are known, the most popular ones are:
- deposits in banking institutions (deposits).Money that a person gives to a bank at a certain percentage makes a profit;
- bonds.The profit consists of coupon income, which is calculated in a specific time period.As a rule, this can happen every 3 or 6 months.Once you own long-term bonds, you have the opportunity to make a profit for a long time;
- stocks.Income on securities is generated in two directions at once.The purchase of securities is nothing more than the purchase of a part of the business, the value of which will increase over time, and with it your investments.When buying dividend securities, you can expect to receive an annual profit, which will be directly credited to the existing block of shares;
- real estate.Today, many investors consider this asset to be one of the reliable ways to make a profit.If you invest financial resources in the acquisition of this asset, you will ensure a constant flow of finance from renting out real estate.In addition, real estate is constantly growing in price.The picture of making a profit is the same as from buying securities;
- Mutual funds and otherinvestments.This direction is usually chosen by lazy people who do not want to bother with where to invest their finances.By choosing this option, you give your capital to professionals who have a great knowledge of the world of finance, and will be able to more effectively manage the resources received from you.For money management, you will need to pay a set reward;
- money in debt refers to assets.This is due to the fact that you do it not for “thank you”.If such transactions are not supported by financial interest, they will no longer be an asset, and will turn into a liability;
- acquisition of assets that will increase in value after some time.This category includes precious metals, as well as antiques, etc.The value of these assets increases every year.
- a mortgage;
- consumer loans that are usually taken out to purchase things, entertainment activities, and travel;
- movable property and real estate.Everything that you have and apply in everyday life is usually called a liability;
- money is borrowed.If you were lent funds out of friendship, without demanding any interest, then this is a liability.
For a better understanding, consider the following example. You suddenly became the owner of $ 80,000. The source of this money is not important at all — it fell from the sky, got lucky in the lottery, a successful find or inheritance. What matters is how you deal with them. With this money, you can buy real estate that will have a normal condition, and be located in a prestigious area. In other words, a liquid object that will be easy to sell or rent out. For example, you chose the second option and after buying an apartment, you immediately rented it out with a monthly payment of $ 400. This means that you will receive $ 4,800 for the year, removing all utility bills, and you will still have $ 4,000.
Thus, by purchasing this property, you have received a permanent income in the form of rent. In simpler words, an asset is something that gives you a certain income.
However, this is not the most important thing. There is such a process as inflation all over the world. Thanks to it, prices are reviewed every year, and upward. Real estate is no exception to the rule. The standard increase in its cost does not exceed 15-20% per year. If you take into account 15% growth, then, in 3 years, your property will have a different value, $ 80,000 will turn into $ 116,000. That is, buying a property in 3 years will increase your initial investment by $ 36,000. In addition, the rent will also not stand still, and accordingly your income will also increase.
If you add up the income that you can get from raising real estate prices and renting it out, then during this time you will enrich yourself by about $ 12,000. Agree that it is not bad to get such an income without doing anything.
Of course, it would be possible to go the other way. Most people believe that as money comes, so it goes. Do you agree with them? Then you can spend this capital on an expensive car from a car dealership. But be aware that as soon as you leave it, the purchase will lose approximately 10-20% in value. To this amount, you should add expenses for insurance, parking, car care, fuel and lubricants, maintenance and other procedures. A car can charge you up to 300 thousand rubles per year.
If you want to put it up for sale in 3 years, you can only count on 50% of the initial investment, since during this time you have lost almost 1.5 million rubles. In addition, the cost of operating a car can amount to almost a million rubles in 3 years. As a result, we receive expenses of $ 3,000.
In the first situation, we invested in an asset and received an income of $ 12,000 for it, in the second we bought a liability and lost $ 3,000. For example, we have taken common cases so that you can understand what assets and liabilities are and what their differences are.
Removing liabilities from your life will not work, because our whole life is mostly made up of them. Just remember the clothes, products, and appliances that we use all the time. The main thing in this case is to achieve a balance between assets and liabilities. The profit that assets bring should not be less than the cost of liabilities. It is unlikely that anyone will be able to change the situation quickly, as this process can take a long time.
To achieve a balance, decide on the amount of monthly expenses. Then cross out the things you can do without from the list. For example, if you spend a lot of money on entertainment or buying unnecessary and expensive things, and you can’t eliminate them, then at least first reduce these expenses by half.
Now count your assets, namely the monthly income they give you. Compare the results obtained. Your income should be more than your expenses, and if it’s not, then it’s time to change your habits.
You can set a goal — to receive income from assets in the amount of 10% of liabilities. Having achieved this goal, continue to increase the bar, etc. Divide a large-scale goal into several smaller ones, so that you can see small, but still significant achievements, and still have an incentive to move towards balance.