The Difference Between Assets and Liabilities

DECEMBER 27, 2016
Passive Income MD


These words assets and liabilities get tossed around quite a bit when it comes to the subjects of financial independence, financial freedom, investments, frugality, etc. In fact, I often use these same key words on my site, so I figured it’d be worth taking a little time to define how they’re being used.


There are different definitions depending on whether you’re looking at them from a tax, business, or individual perspective. It’s no secret I’m a big fan of Robert Kiyosaki, author of Rich Dad, Poor Dad, and as someone who is pushing towards financial freedom, his particular definition really resonates with me.


Assets


Assets are things that create cash flow directly into your pocket.


What are some of these things:

  • Savings Account

  • Stocks, Mutual Funds, Bonds

  • Cash-flowing Real Estate Investments

  • Businesses


Another way to look at it is that if you stopped working your day job, whether that’s as a physician or anything else, where would the cash to cover your expenses be coming from? Those things are assets.


Liabilities

Liabilities are things that take money out of your pocket, or expenses in other words.

  • Primary Home

  • Cars

  • Boats

  • Credit Card Debt

  • Student Loans


There are many definitions for Financial Independence, but I think the simplest one for me is - You’ve reach Financial Independence when the cash flow from your Assets covers your Liabilities. Obviously the major way to work this equation in your favor is to increase the cash flow from your assets and reduce your liabilities at the same time.


We often confuse the two words assets & liabilities and that may be part of the reason so many of us ultimately struggle financially. Hopefully this helps.

For more by Passive Income MD, check out his self-titled blog Passive Income M.D.

 


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