Financial Literacy: What is an Asset and a Liability?

Learning to be financially free is a process, which includes new practices, integration of new concepts and also the destruction of paradigms that we bring from the education of our parents and the school. For example, financial education teaches us that saving money and saving even more is NOT the way, as that is what our parents and some school teachers have transmitted to us for years. Instead, financial education shows us that saving is good, but as long as you are preparing to sustain a future investment plan. On the other hand, financial education proposes the following question: "a house" is our biggest investment in life? At the end of the article I will show you.

Those with deep accounting skills are likely to question how I will present the meaning of these two concepts in the title for a person in the process of financial education and who seeks freedom in that area. If you look on the web the meaning of Active and Passive I believe that those who have never had contact with the accounting will not be very clear, and will end up not giving these terms the importance they deserve.

This time the definition of these terms is directed especially to personal finances and, although they are 100% applicable to business finance, I will not present them with complex terminologies that make you hate accounting, which by the way, is an essential subject to master if you Goal is to be a business owner.

An ACTIVE is that good, instrument or operation that, in the simplest way of explaining it, makes you put money into your pocket. In simple words, an Asset increases your wealth over time, it offers you income periodically. On the other hand a PASSIVE is that good, service or operation that takes money out of your pocket in a programmed way. That is, it makes you poorer, you get the income you generate with assets or through a job.

Of course, no one is filled only with Assets and no Liabilities. The key is that the assets you have managed to cover your liabilities and still leave you money to continue acquiring assets.

Let's go to the example of the house I quoted above. Most people refer to the house as "the biggest investment of their life" but, at what rate does the capital increase that you left in it? Can you make a money withdrawal because you are renting more than you originally put on foot? Of course not! The house is not an investment, because it does not have the characteristics they have. The house is constituted as a good, of the very root type. Now, is the house an Asset or a Liability? It depends on how you approach your acquisition. If you took a mortgage (from English Mortgage, which comes from the Latin mort which means death and gage which means promise, i.e. promise to death) to buy your house, and that means that every month you have to "disburse" money and Without any additional income to your salary, then your house is a LIABILITY, because it removes money instead of putting it in your pocket. On the contrary, if you got the same mortgage loan to buy a house, and you rent it, and then you get another one to put it on rent too, then those houses are set up as ASSETS, since they are periodically putting money into your pocket.

Most people are collapsed with Liabilities and only have their income from employees, which is too weak to cover all of their Liabilities. This causes you to fall into what is called "the race of rats" , where every day you get up mechanically to go to work, bring money at the end of the month, finally pass it to your creditors (banks, commercial houses, vehicles, Lenders, etc.) on whose list unfortunately you are not. In contrast there is a 10% of the population that owns 90% of the wealth, and these are those that have a huge list of Assets that give a lot of money to keep increasing the list. Of course, they also have liabilities, but with a focus on obtaining assets (and I will explain in another article in the Financial Literacy series, which is good debt and bad debt).

So that you finish understanding what is an Asset and a Liabilities: If today you are left without employment the Assets would still generate income and the Liabilities removing them that is why the employment is not considered as an Asset. Make this explanation a list of your current Assets and Liabilities.

Then everything goes by how you organize your financial movements, the advice is: keep your liabilities in check and save to acquire Assets. The idea is that your Assets pay more than your Liabilities and there is still money to access more Assets and so on. That way the Assets will give you the money you need to get luxuries, satisfaction goods, etc. Which unfortunately today people get only with Liabilities. From this comes the principle that "the rich are getting richer and the poor are getting poorer", which I will explain in another of these series of Financial Literacy.