Asset & Liability
(Income/Expenses)
Understanding assets and liabilities are very essential for every human being's life financial journey because a distinguishable picture of both important terms in your mind is prepared for you in advance when you planning to purchase a house, car land, bike, or many more that creates income for you or expenses for you, that understanding creates a big difference for your financial discussions, That's is very essential for you to understand a clear picture of assets & liabilities.
By definition, An asset is
that which creates an income for the owner and a liability is that which
creates an expense for the owner.
When
you buy a house you think that you should create an asset but by definition an
asset it should create income for you. No, it is creating an expense
in the form of mortgages, taxes, interest, maintenance of houses, etc. So common
sense demands that you treat it as a liability rather than an asset. The
banker did tell you that you are buying an asset what he did not tell you was
that he was buying the asset for the bank and liability for you.
There is
nothing wrong in buying a house on the mortgage but understand that you are thereby creating a liability for yourself that will entail further expenses. Even if you
buy a house with your own money and keep it locked you should treat it as a
liability as you are incurring expenses for its upkeep in the form of man
tenancy charges, property tax, society charges, etc.
However, if
you buy a house on a mortgage and read it and your rental is higher than the mortgage
then you have a positive cash flow. The house becomes an asset as it generates
an income.
Your cash
flow is an indication of whether you are building assets or taking on liabilities. They believe
they are creating assets in the form of houses, cars, etc. whereas they are
creating liabilities and increasing their expenses.
What differentiates the middle class
from the rich?
It is their
lack of financial literacy. It is the cash flow that makes all the difference.
The rich understand the power of money and they make it work for them. It is
the cash flow that makes all the difference.
The rich create assets and the
assets create income and they create more assets. The balance sheet of the rich
consists of assets like stocks, bonds, real estate, etc. Their income derives
mainly from dividends, interests, rentals, etc. They make their money work
for them and they do not create liabilities. Their expenses are under control.
To become
rich you must have a passion for money. Making money is a game and you must
enjoy playing it.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock
