If you have read our articles on “Guide To The Ultimate Personal Balance Sheet” or “5 Things That Are Eating Your Money Away“, we keep talking about asset and liability. Understanding the aspect of asset and liability is the key for improving your personal finances. The path to building wealth is simply increasing assets and reducing liabilities. Often we tend to over-estimate the value of our assets. At the same time there are those type of possessions which at first glance look like a good idea but financially might not even be an asset rather a liability. At the same time there are those which you are unsure about. We have created this simple tool to help you find the truth and support you in choosing the correct allocation in the personal balance sheet.
What is an Asset or a Liability?
While there are accurate definition of assets and liabilities terms in the financial and accounting world. But when it comes to our personal finance, we have simply defined them as follows:
Asset
Object that stores financial value and ideally increases in value over time.
Liability
Anything that incurs costs for owning without generating or storing any financial value. They simple keep burning a hole in your pockets.
What do the results mean?
Appreciating Assets
Assets that have increased in value since the time of purchase. Such assets increase your net worth over time through their growth. They excellent store for value. Aim is to increase the amount of such assets in ones portfolio or possession.
Depreciating Assets
Assets that have decreased in value since the time of purchase. Such assets even though still store some value but will decrease your net worth over time and may even turn into liabilities. This can happen if the current price of this asset has decreased, if the incurred cost of keep an asset overweighs the appreciation in price in spite of price growth or both. If there are no reasons why the price dynamic shall change in the future, it is always a good idea to get rid of such assets in order to conserve the net worth.
Liability
Liabilities don’t add to you net worth but keep decreasing it constantly due to their non-existent and the constant costs they generate. You should get rid of such objects at the earliest chance as having possession of such objects will be a constant burden for you.
Did you come across any surprises, things which you perceived as assets but turned out to be liabilities or vice-versa? Let us know if this tool was helpful to you in the comments below. Also share this tool with others to help them have their own realisation moments.
