If I go by the book, an asset is anything you own that holds value and can be easily converted into cash. Whereas a liability is anything that you owe to others. According to which, a vehicle, a property, the cash that you own, etc., appear to be assets. While everything you owe to others, like loan repayment, overdue expenses, etc., count as liabilities.
This is how I would classify assets and liabilities until I learned about Cash Flow.
What is Cash Flow?
Cash flow refers to a consistent inflow or outflow of money from your pocket. Cash inflow is when you receive money be it through your salary, profits earned on investments, business income etc. Cash outflow is when you are paying money, it includes all the expenses you incur.
Now fit this concept into the whole idea of differentiating an asset from liability, you will better understand the difference.
Robert Kiyosaki, a known name in the world of personal finance and the author of the famous book says:
Anything can be considered an asset in its real sense only if it is putting money in your pocket through consistent cash inflows. Things that takes money out of your pocket is a liability as it leads to cash outflow.
So if you go by this and take cash flow into account while differentiating between an asset and a liability, you will realise the assets you own or think of owning may turn out to be a liability.
5 Assets That Are Actually Just Liabilities
So what have been some liabilities that you thought are assets?
1. A House
It is on everybody’s checklist to buy a house someday. Owning a house gives individuals a sense of security. It is considered a great asset to own as we have seen real estate appreciate in value over the years.
But when you factor in the cash flow concept, you will see the other side of the coin.
If You Live in the House:
Though you are saving on rent here, a house needs maintenance, and thus you are liable to pay taxes on the property you own. So though it may be an asset in the traditional sense, the house’s ownership takes money away from your pocket. Hence, it is a liability until its value appreciates in the future.
When You Rent It:
In case you rent out the house, it can be considered an asset because it is making you money that can be utilized to pay for the cost of its ownership, and the balance left is your gains.
2. A Car
A car or any other vehicle is also considered an asset as it can be easily exchanged for cash.
But did you know: A car depreciates by around 25% the moment you drive it out of the showroom. It further depreciates around 20% every year.
So though it is an asset, it loses value like melting snow. Plus, if you are riding the car, there comes maintenance cost, fuel cost, and to an extent, repairs as well. A vehicle is also taking money out of your pocket and is also highly depreciating, and thus, it is a liability.
However, if you put your car at work and rent it, there are chances that it will pay for itself and also earn you some profits.
3. Non-Dividend Paying Stocks
A non-dividend-paying stock is where you have bought some shares of a company, but it doesn’t pay dividends. Individuals buy these shares, hoping that the money the company saves through not paying dividends will be utilised to fund their other projects that will eventually increase their share value.
People investing in these stocks solely rely on capital gains. Though this type of asset doesn’t involve any upkeep cost for its ownership, it neither generates a cash inflow.
Although this is debatable whether non-dividend paying stocks are an asset or a liability.
Here I am talking about electronics that don’t add value to your life and don’t help you make money. Electronics that enable you to do your job, like your phone, laptop, etc., are considered assets; they help you have a cash inflow.
While other electronic items like an extra pair of phones or video games don’t help you generate money, they waste your time and energy that you may have otherwise put towards making money. They also timely incur you repair costs.
So unnecessary electronic items are a liability.
5. Luxury Brands
Individuals buy designer items for the status symbol it holds and then back their splurge by saying designer items hold value.
And it’s true, designer items do hold value, but over time they also experience wear and tear. So though it’s great to have designer items, you should think about the restoration cost that may incur later on to offset the wear and tear caused because of usage.
Luxury items also don’t help you with any cashflow and thus can’t be considered an asset.
Do You Own Any Asset That You Now Think of as a Liability?
Now that you know the cash flow concept, I am curious to know if you own any of the above liabilities. Also, how did you like this whole idea of distinguishing assets and liabilities with the help of cash flow?
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
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