Asset vs Liability

Asset vs liability is the first theory you need to understand in order to have a stable financial future. Not understanding the difference between these two ideas is the single most significant reason the middle class can never quit working and become wealthy.

We all start off with a poor understanding of money. Each time you find money in your hands, you make decisions on how to spend that money.

The quality of these decisions depend on your understanding of money. These choices determine whether you will be rich, poor, or middle class. It is only through persistent effort that your knowledge and understanding can be increased.

A liability is something that takes money out of your pocket every month, whether you made money or not. A couple good examples of these are your house and car. Unless you have a rental property or a taxi service chances are you have some sort of payment due every month on these expenses, regardless if you worked or not.

There is no such thing as job security in today's global market. Every time you add another liability you are committing to an expense that does not bring you any income in return. If you lose your job chances are your liabilities are going to become problematic to pay, to say the least.

Those that are financially literate understand that an asset is something that puts money into your pocket each month, regardless if you work or not. To understand an asset you must first understand passive income and how it relates to your current cash flow.

When you have an asset that produces passive income you are receiving your profits from your investment regardless if you do anything to maintain it. Rental property is a great example of this. If your landlord decided to take the next week off you still are going to have to pay them rent in full.

Here are a couple more examples of passive income.

* Bank Interest

* Dividends

* Rental Property

* Appreciation

* Royalties from inventions, music, movies, software, games, books

* Entrepreneurs get profits from managed businesses

* Insurance, Network marketers, and Securities agents get residual (passive) income from past sales


It is important to understand there are times when a asset becomes a liability and vice versa. The house you live in is a liability until the point that you sell it and make money on the appreciation. Up until then you have a mortgage. If you were to rent the same house out for enough to pay your mortgage and make a little profit you now have the same house acting as an asset.

With these theories in mind we can now resolve many of the problems in the cash flow patterns of the poor and middle class.