Assets and Liabilities
Most people don’t know the difference between assets and liabilities. When asked to calculate their net worth, they usually point to depreciating liabilities like their car or the house they live in.
This stems from financial ignorance and a lack of financial education. Traditional education, as it exists in its current form, was set up during the industrial revolution and its primary purpose was to churn out hard working employees. The primary objective was to create a nation of hard workers, not hard thinkers.
With the information age, it's become easier to access the right knowledge and the right tools to gain your financial freedom.
Assets are anything you invest in and the value of said investment goes up over time, preferably much over the rate of inflation. Liabilities usually depreciate in value over time.
Classical examples of assets are mutual funds, stocks, real estate, gold and your business. But if delved a little further, do all stocks go up in value over time? The same question can be asked of real estate or another asset class?
So, a security can both be an asset or liability, the investor’s job and financial prudence is to know which is which, and that is where financial literacy comes in.
Similarly, the definition of a liability also depends on its use or purpose. A car used for personal use depreciates in value over time, requires services and repairs and eats away at your pocket whereas a car used for rental/cab/car business might be an asset because it generates income for you and puts money back into your pocket.
A house that you live in is a liability because it needs you to maintain it. An investment property generates rental income and inflates in value over time, negates any expenses required for repairs.
Why don’t I just keep money in the bank? - Because Inflation is the beautiful monster which eats up the value of your money sitting in the bank. You do need some liquid funds, particularly for emergencies which I always recommend one to keep in the form of sweep in fixed deposits.
Maintain an emergency fund, insurances, turn most of your active income into assets and let those assets generate passive income for you with which gain both time and money freedom. Money works to make more money and you use that money to do whatever you like.