What are Assets and Liabilities? A simple explanation.
What are assets and liabilities?
In this post, we are going to discuss what are assets and liabilities. Although these words might sound a little complicated for the non-finance guy/girl, however, once you understand the basics, it’s won’t be complex anymore.
Typically, assets and liabilities can be defined as:
Assets: It is a value that a person holds with an expectation that it will provide future benefit. For example- cash, property, gold etc.
Liabilities: It is an obligation that a person has to pay in future due to its past actions like borrowing money in terms of loans, bills, credit card debts etc.
In short, assets are the value that the beholders hold and liabilities are the obligations that he has to pay off.
Now, this is the definition of assets and liabilities that we are traditionally taught.
From the above definitions, we can consider our house, cars, washing machine, fridge etc as assets as they have a value and can provide benefits in future.
However, the definition of ASSETS & LIABILITIES varies a little according to Robert Kiyosaki.
What are assets and liabilities?
The concept of what are assets and liabilities are beautifully defined in his book ‘RICH Dad POOR Dad’ which I’m going to describe here.
In the book ‘Rich Dad Poor Dad’, Robert Kiyosaki had two fathers. The Poor dad was his real dad and the Rich dad was his friend’s dad. At a very young age, Robert Kiyosaki decided to listen to his Rich dad if he wants to become successful in future.
Here is how the RICH defines assets and liabilities which his rich Dad taught him.
- An asset is anything that puts money in your pocket.
- A liability is anything that takes money from your pocket.
Assets can be a business, real estate, paper assets like stocks, bonds etc. Anything that brings money in your bank account.
For example, if you buy stocks and its price appreciates, it will bring money to your pocket.
If you have a business and it’s growing, then again it will bring money to your pocket in future and hence, can be termed as an asset.
On the other hand, liabilities can be your expensive car, a big house bought on the mortgage with excessive maintenance and running charges, expensive phones etc. These are those materials that take money from your pocket.
The concept of ‘money in’ and ‘money out’ is good enough to define assets and liabilities.
Now, the trouble is, anything can be an asset or a liability, depending on whether it brings money to your pocket or takes it away.
For example, in the book Robert argues that ‘Your house is not always an asset’.
Let us understand what he means by this.
If you own a house and you pay excessive expenses for running the house like electricity bill, water bill etc, then it is a liability. The house is taking money out of your pocket.
However, if you own a house and you are making thousands of rupees a month by renting it, then it is an asset. The house is putting money in your pocket.
Overall, it depends on how you are using your house. Your house is not always an asset.
This is something that most of the traditional people of India won’t agree with. To be honest, even I didn’t like this idea of Robert Kiyosaki in the beginning and argued with myself a lot about it. Nevertheless, after considering a lot, I concluded that his definition is correct.
The problem is that most people do not understand the concept of assets and liabilities. They buy expensive watches, shoes, sunglasses etc considering them as an asset. However, it turns out to be an expense.
The only thing that separates the poor and rich is how they spend their money.
Poor invests in liabilities that they cannot afford and consider them as an asset. Whereas, rich invest in assets.
If you haven’t read the book ‘Rich dad Poor dad’ yet, I would personally recommend you to read it. It’s one of my favorite books on personal finance and I have read it multiple times. You can order the book using the Amazon link here.
That’s all. I hope you have understood what are assets and liabilities.
Do comment below what is your view on – Whether your house is an asset of a liability?
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting (Connect with me over twitter here).