Understanding the Principles of Assets & Liabilities
Spending money is an essential part of our lives. For example, it could be using the money for a place to live, buying everyday necessities to get by, or splurging on your favorite item
This exchange of money for goods is a process that occurs every day but can fluctuate based on personal decisions, whether they’re good or bad.
In the past, making money was a relatively simple task, there were no nuances or complicated things you needed to do. All you had to do was provide value to an employer from 9–5 and come home with a paycheck every week.
However, in this day and age when the internet has become so prominent, many have found ways to keep working day jobs by supplementing others with value in their free times.
This isn’t going to be a guide on how to make money in 2020 but rather how to manage the money you already possess.
Let me ask: How much money will each character end up with
- E-commerce Man — 500k (Initial Bank Amount)-100k (New Porsche)-100k (Jewelry, Designer Clothes)- 150k (Spontaneous house downpayment)=??
- Billy the 9 to 5 Man — 300k (Initial Bank Amount)-100k (Index Fund Investment)- 50k (Down Payment Investment Property)
As you can probably tell, in the end, E-commerce Man and Billy ended up with the same amount of cash. This just goes to show how important managing your finances can be, even though E-commerce Man started with more, in the end, he ended with equal amounts as Billy.
Of course, this isn’t a direct representation of real life. Since E-commerce is raking in more dough compared to Billy, he has more money to spend relative to his income. This however does not mean he can spend his money irresponsibly.
In a matter of a few years, while E-commerce Man is busying enjoying his life with a high risk of one day running out, Billy has a plan and is prepping to be set for life.
While E-commerce decided to spend his money on things that he didn’t need, Billy decided to spend his money on things that would generate revenue for him over the long run.
A & L
This directly ties into the principles of assets (Billy) and liabilities (E-Comm)
The term assets and liabilities are terms often referenced when teaching financial literacy.
To define these two terms simply: Think of a bank
- Assets — Something that puts money into this bank
- Liabilities — Something that takes money away from the bank
The most common examples of assets and liabilities are houses and cars
A gas-based car runs on gas which costs money and can take significant amounts of money out of the bank each month. On top of that, there are other expenses such as potential repairs, insurance, upgrades, etc making this a liability rather than an asset.
A house on the other hand could be lived in while at the same time renting out rooms of the house. Using the rental payment to pay off the mortgage would eventually pay off the house over time just from someone else living in it. On top of that, the value of the house also acts like a tangible stock that can grow in value depending on the housing market in that specific area. This growth of value and putting money back into the bank is an asset rather than a liability.
Now, cars can also be assets and houses can also be liabilities. Depending on your specific circumstances, you must understand what is viable for you and what isn’t.
If you need the car no matter what to get to work and make money, then it is well worth it. If the car is part of your personal brand, then that is also considered an asset as you’re not you without your car.
This can be the same for houses if you’re only using one room and not using/renting the 2 others. This would be considered a liability as you’re not using the house to its maximum potential.
How Can You Make Assets and Cut Liabilities?
Liabilities are often the most prevalent in people’s lives, they are unsure of how to cut them out and how life would look like if they did.
Things like $5 coffee, designer clothes, new shoes, yearly iPhone revamp, new cars, eating out every night, not looking for the best deal — can all count as liabilities.
They are simply taking money out of the bank
Remember that these things are NOT necessities, stuff like coffee can be reduced or made cheaper, shoes can be worn for years if taken care of, each year’s iPhone only has minor changes, the next new car won’t float, not eating out will teach you how to cook and save money.
All these things that are extra instant gratifying items are not needed and shouldn’t be pursued.
Instead use income that would have been used on these things towards investments in the stock market, the housing market, or anything, in general, that will boost your life and help you grow more income streams!
THANKS FOR READING⚡️
I will be writing more about my Instagram experience, financial freedom, and whatever I find interesting. Please let me know in the comments on how I can improve my writing, and if you enjoyed please consider smashing that follow button!!
— Tristian Xu
