Lesson # 18 : The Real Difference Between An Asset And A Liability

Asset: A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

Liability :An individual's legal debts or obligations that arise during the course of his lifetime.

That's the definition that has been passed on to us for generations and for all I care it's absolute crap and rubbish.

For instance answer the following questions:


Is your house an asset?


Is the money in your bank an asset?


Is your car an asset?


If the answer's to the above questions is YES then let me tell you that you are absolutely wrong and are like those people who have given the above definitions.


Let us examine the above examples in detail :


Your house is an asset if it put's money in your pocket. So, it becomes a real asset when you sell it and receive money or when you put it on rent and receive money from the house.


Similarly, idle cash in your bank account is not an asset because it is just there and it is not growing in value over a period of time. A 3% interest is nothing when you can easily earn 35-40% monthly if you invest that money.


And the car is definitely not an asset despite the fact that it acts as a mode of transportation because at the end of the day it is taking money out of your pocket and not putting money in your pocket. It's depreciating in value over a period of time and therefore is a liability.

Most people mistake a lot of their liabilities for assets and that is perhaps why a lot of people take debt they cannot repay as they have miscalculated their assets and liabilities which results in an imbalance in their cash flow sheets.



Simply put


An Asset puts money in your pocket at regular intervals or after a certain period
A Liability takes out money from your pocket at the speed of light


Happy Investing


Udit Sabharwal { On behalf of Doodle inc}