The lack of education on the difference between assets and liabilities is why many people struggle financially. Although some areas of the subject can become gray in nature others are black and white. Always remember, assets will put money in your pocket while liabilities take money from your pocket. One of the worst mistakes you can make in your financial life is thinking that liabilities are assets. With that being said here are some examples of common liabilities.

Liabilities

• Homes
• Cars
• Boats
• Clothes
• Electronics

Contrary to popular belief a house is not an asset. As many people found out during the recent crash of the real estate market in 2008, houses do not put money in your pocket. Houses have more expenses than most people think. They do not generate positive cash flow for the owner. A home mortgage is the first major expense associated with owning a home. Most Americans think they own their own home – in actuality the bank does. A typical 30-year fixed mortgage at 5.5% will incur nearly 100% interest on the principal. In other words, you will pay $100,000 in interest for a $100,000 loan.

If you are fortunate enough to have enough money to purchase your home outright you will still have monthly liabilities associated with your home. Property tax is a universal expense associated with home ownership. Homes in the city are usually subject to higher taxes than those in the county. Varying with climate, homes need energy for heating and air conditioning. A house in cold regions would obviously need to be heated for comfort and to prevent water pipes from cracking. Homes in southern regions with high humidity need air conditioning both for comfort and to prevent mold damage. Maintenance expenses may also contribute to your home as a liability. Will you need to repair a worn out roof? What about replacing an old water heater or furnace? Over the course of time maintenance expense can really add up.

Cars are another heavily misunderstood liability. One of the worst financial decisions made by people today is purchasing a new luxury automobile. Vehicles rapidly deteriorate in value when going from a new to a used condition. It is said that many vehicles drop 10-20% in value within the first week of use. Not only that, automobiles have associated expenses like fuel costs, maintenance and insurance. Although having a reliable car for commuting to work and back is a good idea, cars are not assets.

Assets

• Rental Property
• Dividend Paying Stocks
• Patents/ Inventions
• Royalties

When are houses considered assets? Although rental units incur many of the same costs as homes, rental property puts money in your pocket. Rental units that generate positive cash flow are assets. A typical single family rental property in the midwest  can reasonably demand around $700 per month in rent. Expenses for that same rental property usually cost around $500 (electric, water, cable etc), leaving $200 in positive cash flow. Because rental units have the ability to put money in your pocket, they are usually assets.

Just like houses, not all stocks are considered assets. Shares of stock in publicly traded companies are actually liabilities until you sell them at a profit. However, some stocks provide monthly payments called dividends to their shareholders. These dividend payments turn stocks into assets because they generate positive cash flow for their owner. Finding stocks that you think will increase dividend payments in the future is a great way to invest in the stock market.

In order to get out of the “rat race” you must generate enough cash flow to cover your liabilities. The best way to achieve this is to accumulate assets instead of liabilities. Once you accumulate assets with positive cash flow you can use that money to buy even more assets. Reinvesting your profits to buy more assets is one of the only ways to achieve wealth. The rich buy assets, while the poor and middle class buy liabilities that they think are assets.


Want to become a better trader? Click here to sign-up for a FREE trading e-course taught by a former floor trader!

[wordbay]silver bar[/wordbay]