Difference between Assets and Liabilities: Understanding the financial impact

Financially active or passive? These terms are often used in accounting accounts. Very interesting to understand!

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Why is learning the difference between a liability and an asset important? 🤔

👉 In reality, learning what are liabilities and assets in our budget regarding personal finances. It’s essential to achieving financial freedom!

The good news is that despite these technical words that seem complicated. It's actually very simple to understand. 😊

The basics

Passive

Financial liability = An expense that loses money.

For example, a loan for a car.

In fact, the car you are going to buy is (in most cases) a double liability. In this case, you are going to lose money with:

Loss of car value over the years
The negative interest that will accumulate with your credit

👉 If you calculate the liabilities with your personal budget. Note that a liability can be a simpler expense. For example:

Subscription
Insurance you never use
A location

Active

Financial asset = Money coming into your account

In reality, it is an income. For example:

A job
A dividend stock
Ownership of real estate

👉 Let's take the example of a dividend stock and assume that it will perform well in the future. In reality, you have a double asset:

Increase in stock value (higher price in the future compared to today).
Entry of money into the account with each dividend received.

Ah okay I have understood. To summarize, an asset is income and a liability is an expense? 🤔

In broad terms yes! On the other hand, there can be what I call passive-active. Or active-passive depending on your point of view.

Liabilities – assets

Now that you know the basics of a liability and an asset. There are situations where we can have an asset-liability.

For example:

Real estate loan

On the one hand, it is a liability that makes you lose money with the interest on your mortgage. On the other, it is an asset that allows you to avoid paying rent or reduce the tax burden.

Job

A job with a high rate is also an asset-liability. On the one hand, it is an asset that brings in money. On the other hand, it's a liability that increases your taxes. As a result, your expenses will increase.

👉 To conclude, when you have an asset-passive you lose money on one side and you gain on the other. Obviously, the goal is to gain more than to lose. 😉

The difference between a rich and a poor

In reality, the difference between a rich person and a poor person comes down to the ability to generate assets versus liabilities..

The book “Rich Dad, Poor Dad” writes in detail about this aspect.

Poor = liabilities > assets

Rich = assets > liabilities

In reality, a person who has liabilities equal to or greater than his assets has a difficult financial situation. While a person who has assets greater than his liabilities has (usually) a stable financial situation.

The purpose of frugalism

👉 The goal of frugalism is to have assets greater than liabilities!

In reality, when a frugalist has assets (i.e., without working) that offset liabilities, he will have achieved financial freedom.

Examples of creating liabilities

👉 Many people don't realize it. But in our Western society, we were taught to create liabilities for everything and for nothing with the consumer society.

For example, if you surf on a clothing sales site. You are indirectly involved in creating liabilities. Because you will consume later.

Another example, when you go downtown to a shopping area. Looking at shop windows indirectly creates desires, which will make you consume, which will create more liabilities for you.

More simply, the advertising that you watched with your social network or on YouTube before a video. This is the creation of a liability! It's no coincidence that we are bombarded with ads on smartphones.

Transform a liability into an asset

👉 On the other hand, we are less well informed about the creation of assets.

Assets can be created for example by:

Investing part of our salary in an ETF, dividend stock or real estate market

Indeed, instead of spending your money in a futile way. You can invest and increase your assets! (Knowing that investment can cause a risk of loss of money.)

Selling old items on a second-hand site

Every item you don't use or use little becomes a liability! By selling it, you create a liability into an asset.

Do it yourself

Every company you pay for a service is a liability! How to avoid this liability? You do the work yourselfFor example, if you cook your own meals, you avoid paying for a cook.

Reduce needs to the essentials

The more you focus on the essentials, the less you will consume. If you consume less, you automatically reduce your liabilities.

Take a walk in a natural place close to home

Quite simply, if you walk in the forest near your home, you avoid passive temptations, for example.

Commercial spaces
Advertisements on your smartphone
Downtown advertisements

➡️ The fewer liabilities you have, the more you increase the chances of creating assets.

Conclusion

➡️ Basically, an asset makes you money and a liability makes you lose money.

👉 Without surprise. The more assets you have, the closer you get to financial freedom. The more liabilities you have, the less financially free you will be!

To understand your liabilities and assets, it is essential to make a budget of your personal finances. Then, simply subtract your liabilities from your assets.

Note that each person has the means to transform liabilities into assets.

Note: A book that delves deeper into this topic, active or passive, is ”Rich Dad, Poor Dad”, by Robert Kiyosaki. This is an important book for realizing how liabilities quickly impoverish us.

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Overall, this blog lives on sharing a frugal and minimalist lifestyle.

For a question of transparency towards the readers. All recommended products are in order to make life cheaper, simpler and to promote the essentials.

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I decided to create this blog to develop and help readers who are looking for a simpler and more economical life.

Compared to before, I was a person who consumed a lot until the day I realized that my consumption made me sadder and poorer 😑

Now I prefer the minimum of my needs to be happy and achieve my financial freedom.

Without realizingI started to focus on saving and investing to depend on a boss for as little time as possible and to speed up my personal projects.

As a result, I am getting richer in a way that I never imagined since I have an average salary in Switzerland.

It is for this purpose that I decided to create this blog. In order to share and learn with other people who seek freedom and simplicity 😉

Are you rather minimalist or frugal Jonny?

I am as minimalist as I am frugalist. However, there are situations where I lean more towards an art of life.

To conclude, I think the most important thing is to feel comfortable in your lifestyle 😊

Minimalism and Frugalism

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Difference between Assets and Liabilities: Understanding the Financial Impact