So, let's jump right to it. What's the difference between an asset and a liability? If taken for face value, the topic is easy to understand. An asset is something that can provide future economic benefit and liability is what is owed or must be performed. But the difficult part comes in when the lines begin to become blurred as to which category something belongs in. I will give a few examples that should help make the subject more black and white.
1. Assets - will it eventually be worth more later than it is now, or what is the current value.
Houses - usually these are considered assets because historically the value has increased every year, but ask people who have not recovered from 2008 housing crash what they think about this.
Mutual funds/government bonds/stocks- even though there is no guarantee that they will be worth more now than later, they are considered assets because you own them and there is no chance you will ever owe money or services for them. There is the possibility of losing money that is invested, but there cannot be a negative balance.
2. Liability - An item that you owe money or services for.
Student loans - a necessary evil in the case of a lot of people, but they are definitely a negative. They could possibly increase your lifetime earning potential of handled properly, but they can have high interest rates and expensive month-to-month payments (see recent post on how to handle if paying these becomes a problem).
Car payment- I have spoken on these before, but buying a new car is definitely a liability. The car itself is an ASSET because it has a value, but the car payment is what you owe for that asset and in a lot of cases you owe more on the car than it's worth. The moment you take that new car off the lot it is now used and worth thousands less.
These examples are just that, examples, and many more things can follow into the asset and liabilities list. But ALWAYS attempt to keep more assets than liabilities, that is how you build your net worth!
1. Assets - will it eventually be worth more later than it is now, or what is the current value.
Houses - usually these are considered assets because historically the value has increased every year, but ask people who have not recovered from 2008 housing crash what they think about this.
Mutual funds/government bonds/stocks- even though there is no guarantee that they will be worth more now than later, they are considered assets because you own them and there is no chance you will ever owe money or services for them. There is the possibility of losing money that is invested, but there cannot be a negative balance.
2. Liability - An item that you owe money or services for.
Student loans - a necessary evil in the case of a lot of people, but they are definitely a negative. They could possibly increase your lifetime earning potential of handled properly, but they can have high interest rates and expensive month-to-month payments (see recent post on how to handle if paying these becomes a problem).
Car payment- I have spoken on these before, but buying a new car is definitely a liability. The car itself is an ASSET because it has a value, but the car payment is what you owe for that asset and in a lot of cases you owe more on the car than it's worth. The moment you take that new car off the lot it is now used and worth thousands less.
These examples are just that, examples, and many more things can follow into the asset and liabilities list. But ALWAYS attempt to keep more assets than liabilities, that is how you build your net worth!