Knowing How to Invest by Knowing Your Assets and Liabilities

Most people just don’t know how to invest. It’s not entirely their fault, after all, there is a lot of misinformation given by people luring the unsuspecting into ‘get rich quick’ schemes. Few schools offer financial curriculums, and the media tends to bury good information it imparts under a sea of nonsense – looking for ‘the headline’.

Despite all this however, while it’s understandable why most people haven’t learned how to invest wisely, it is their personal responsibility to seek out and learn what they were never taught correctly.

There is one main issue that blocks most people from investing properly and building wealth – most people don’t know the difference between an asset and a liability. In fact, most people don’t even know the definition of these two words.

Roughly speaking…

  • An asset is something that you own that puts money into your pocket passively; without you having to work at it.
  • A liability is something that takes money out of your pocket passively.
  • When you invest properly, you invest in assets. As you invest in assets you build the number of items you own that passively pay you, and as such you increase the amount of money that you earn without putting in any work, which increases your wealth.
  • When you don’t know how to invest, you purchase liabilities that you think are assets, and you lose money for each of these that you own, which makes you poorer and poorer.

Assets include cash that’s sitting in an interest accruing savings or cheque account and stocks, bonds and other holdings that either grow in value or that also pay off dividends. Once you purchase these items you haven’t lost any money, and you continue to earn extra money for as long as you own them. Most people know this.

Where most people get tripped up is the fact that they purchase a lot of liabilities that they think are assets. Two of the biggest liabilities disguised as assets are your house and your car. Most people are taught that their house and their car are assets, and as such they are the only investments they own. But unless you own your house and are renting it out for income, it is not an asset because it is taking money out of your pocket every month via your mortgage. The same is true of your car and car payment. The market value of your car and your home are assets, but when you just own them they act as liabilities.

When you learn how to invest, you will learn to understand whether you are purchasing an asset or a liability. This knowledge alone will put you heads and shoulders above just about everyone else out there when it comes to financial sense.

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