Assets And Liabilities - Understanding The Structure Of Your Wealth

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We tend to focus on assets and forget about debts. Financial security requires facing up to the big picture: assets minus debts.
Suze Orman

Assets And Liabilities – It’s Really Not That Complicated

I think for some of us, the idea of learning knew terms catapults us back in time to elementary school “terms to know” tests. The good news is, I’ve only got two for you here and they’re really pretty simple. Assets and liabilities.

Knowing what these terms mean will make navigating the world of personal finance much easier for you, especially when looking to figure your net worth.

Defining Assets

Let’s take “assets” first. I like to think of assets as things that are either cash (or cash equivalents), investments, real estate, vehicles, businesses, or other valuable items you own (jewelry might be an example). Basically, if you own it and it has any sort of significant value, it’s an asset.

Or is it?

I actually read a quote just today as I prepared to write this from Mark Cuban where he indicated that he thought it best to base net worth off of cash and investments alone. He based this primarily on their liquidity.

If I remember correctly, Robert Kyosaki also argues that something should only be considered an “asset” if it produces some sort of income. He also makes the arguments that, based on this idea, a primary residence should not be considered an asset. (Read more in his book “Rich Dad, Poor Dad.”)

I think these are excellent points, don’t get me wrong. But, they don’t necessarily represent the generally accepted definition of the term. So, I’ll say again, if you own it and it has any sort of significant value, it’s an asset. (Check out my article on the books you need to read to hear from some experts in the space backing me up – 5 Personal Finance Books To Read Now.)

Defining Liabilities

So if assets are good, and net worth is the difference between assets and liabilities, it’s safe to assume that a financial liability is kind of a negative thing. And, it is.

A liability is basically any type of debt you owe to anyone for any reason.

For example, even if you have a mortgage, you get to count the full value of your home when calculating your assets. So, let’s say you live in a $250,000 home. Great, you get to put $250,000 in assets right at the top of your net worth!

But, if you owe $200,000 on that same home, you’ll have to immediately subtract that liability from the value of your asset. Your net worth went from starting at a quarter of a million to $50k.

Boo.

Not So Bad

See? That wasn’t so bad, right?

Now you know two of the more important terms you need to understand when you start evaluating your wealth, specifically in relation to savings and investments, assets and liabilities.

Armed with this knowledge, head over to my post on net worth and put it to use so that you can get a solid look at how your wealth is allocated today! – View Post

And remember, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!

Basically, if you own it and it has any sort of significant value, it’s an asset.

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Alex

Hello, my name is Alex! I'm a public school teacher who has achieved some big financial goals just by getting control of my money using some simple strategies like using a monthly budget. Now I'd like to share what I've learned with you. Welcome to "Bank on a Budget!"