“Debt is one person’s liability, but another person’s asset.” – Paul Krugman
One way or another, we have encountered the words “assets” and “liabilities”. Most of the time, we ignore these words because we presume these are only mentioned during fancy business meetings. After reading this article, you may never look at your next bill or your next payslip the same way as before.
My supportive reader, an asset can be generally defined as anything you own that has monetary value. In personal finance, it is something that puts money into your pocket. It is where you generate income. On the other hand, liability is something that you owe to other parties. Simply speaking, it puts money out of your pocket. You have an obligation to settle these liabilities.
The difference between your assets and liabilities is called your “net worth”. It represents the amount of money you have left after you allocate all your assets towards paying your liabilities. Your net worth can be used as a measuring gauge for your current financial position and a good basis in establishing realistic financial goals.
What are the examples of assets?
Cash can be your bills and coins you have on hand. It can also refer to cash in your bank accounts as well as checks. It is considered as the most liquid asset, meaning you can easily convert it to other forms of assets as it is used in most of our transactions. We use cash to pay for our daily needs. Having cash on hand can also be beneficial for emergency situations like medical bills, property damage, and some other unexpected circumstances.
Investments can be in the form of stocks, bonds, or businesses. You purchase these investments, with the expectation that it will generate profit or will appreciate its value. Having investments can help you achieve multiple sources of income, without solely relying on your salary. Keep in mind though, investments such as stocks and businesses have their own corresponding risks and they may not provide you the returns you desire.
In the accounting sense, properties are non-current assets that cannot be easily converted to cash. Most common examples are real estate properties, antiques and paintings and cars. Now this can be a little bit tricky because some properties are often treated as liabilities. For example, if we buy a house for us to live in, it is considered a liability because you will have to pay off your home loan, utility bills, and home maintenance. But when the house is used as a rental, it can now be treated as an asset.
What are the examples of Liabilities?
1. Bills payable/Bills expense
These include your utility bills, phone bills and internet bills. They are your regular financial obligations, in exchange for goods and services that you have acquired. These are treated as essentials for our daily living and so some of us are having a hard time minimizing these expenses.
2. Property Loan
These include your home loans and car loans. This is the money you owe to other parties when you purchase a property. In addition, you also have to pay for the interest, or the cost of borrowing that money. Take note, it can be problematic if the amount you pay for these loans exceeds your overall income.
3. Lifestyle expenses
These include your movie night outs, vacation get-away, and other leisure activities you enjoy doing. It is not necessarily bad to spend lavishly on these activities, after all, we deserve to treat ourselves every once in a while. But it is important to note that we should only spend what we can afford.
The ultimate goal of financial planning is having a positive net income. You can do this by increasing your assets, decreasing your liabilities, or a combination of both. Being aware of your net worth gives you an idea of how well you are doing financially. It serves as your caution when you are losing the direction of your financial goal.
Some of us have a misconception that all liabilities are bad, while in fact, not all of them are, especially if they are used to purchase income-generating assets. Therefore, it is important to distinguish whether our financial choices are either assets or liabilities. If you are having a hard time, you should talk to a Registered Financial Consultant. Just remember this simple rule, anything that puts money into your pocket is an asset, while anything that puts money out of your pocket is a liability.
By the way dear reader, we’re planning to set up a financial planning webinar soon. If you join up, you’ll learn the ins-and-outs of planning for your Financial Journey from goal setting to planning out your portfolio and even to pass on things to your loved ones.
Disclaimer: Just a reminder, dear reader, that the content in this column is my opinion only and should not be construed as investment advice because I am not your financial adviser, neither did I take into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.