Another extremely important concept to understand in order to become a professional investor are assets vs. liabilities, and what their differences are.
The most important difference between assets and liabilities is that assets put money into your pocket, and liabilities take money out of your pocket.
Assets and liabilities are the basics of every balance sheet, where assets appear on the left side of the balance sheet, and liabilities on the right.
Examples of assets are real estate, stocks, bonds, commodities and cryptocurrencies. All of these examples put money into your pocket.
Examples of liabilities are house mortgages, car loans and all other forms of debts. All of these examples take money out of your pocket.
Most often, assets grow in value, and liabilities depreciate in value. Assets generate income and liabilities create expenses. That is why everybody should aim to own as much assets as possible and as little liabilities as possible!
Assets and liabilities determine a company’s financial strength, its ability to survive downturns, its capacity to grow, the risk of bankruptcy and the true value of the business. This is also applicable to private persons.
Understanding assets and liabilities is looking at what someone or a company owns versus what they owe!
Robert T. Kiyosaki perfectly describes the differences between assets and liabilities in his book Rich Dad, Poor Dad, which we highly recommend you to buy and read!
As you can clearly see in the three examples illustrated above, money keeps disappearing from the balance sheets of poor people and people in the middle class. You can also see that rich people heavily invest in assets that generate extra income on their balance sheets.
This way money doesn’t keep disappearing from your bank account, but instead it keeps adding up because your assets provide you will passive income.
The more money you invest in assets and the less liabilities you have, the more money you will save. It is that simple basically!
The differences between assets vs. liabilities are pretty simple to understand but yet a lot of people fail to understand them.
Understanding assets and liabilities is critical to becoming financially independent and you should always keep them in mind in whatever decision or transaction you make!
We highly recommend you to buy and read Rich Dad, Poor Dad.