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Before you start investing, you should understand the difference between assets and liabilities in personal finance.
Assets make you money because they generate income.
- A liability “takes money out of your pocket” and incurs expenses for you.
- With proper financial planning, you can maximize your assets and minimize your liabilities.
- If you invest a certain amount of your income each month, you can build income and assets.
In this lesson you will learn all about assets and liabilities.
- What are assets and liabilities?
- How are budgets and investments related to assets and liabilities?
- Do you know the difference between assets and liabilities?
In this lesson we would like to give you a brief overview of why these terms are important and what you need to consider when investing money. Below is a simple explanation of what assets and liabilities mean in personal finance.
What are assets and liabilities?
In the broadest sense, an asset is something that makes you money because it generates income and/or cash flow. As you learned in Lesson 1 of the Bitpanda Private Finance Academy, your income is important when it comes to budgeting. Income and revenue are basically the money you receive. So, assets are resources that make you money.
Assets can appreciate in the short term or in the long term, meaning their value increases – an example of this might be your hotel. However, assets can also lose value – like PCs.
Income-producing assets include dividend-paying stocks, royalties and patents. Even high-value items that you own and have already paid for (that is, that you don’t owe money for) sometimes fall into this definition – like your house or your car. .
Income and revenue are basically the money you receive. Therefore, an asset gives you money.
Conversely, a liability “takes money out of your pocket.” Liabilities are tangible things and obligations that cost you money. They do not generate income, but incur expenses for you.
Examples of liabilities include all types of personal loans, such as real estate or car lease payments.
How are budgets and investments related to assets and liabilities?
Suppose you borrow money to buy a car. The car is now a liability to you until you pay off the car loan. If you use your car (which is already paid for and owned) to generate income – for example by running errands – you may earn more than you need to maintain the car. So it can be seen as an asset.
The purpose of creating a personal financial plan is to maximize your assets and minimize your liabilities.
Increase your assets.
The main objective while creating a personal financial plan is to maximize assets and minimize liabilities. This involves carefully monitoring your income and expenses. How do you generate revenue and income and what causes expenses? How can you generate extra income?
Budgeting for investment
For example, if you invest a certain amount of your income each month, you can use it to build more income and assets. Investing money means giving available money to someone else in the hope of getting more money (profit) later.
Learn financial literacy.
You can start educating yourself regularly about financial topics at any stage in your life – it’s never too late. In fact, learning more about finance is an investment in your future.
Therefore, after analyzing your income and expenses, you should consider how to make sound financial decisions and how to generate regular income for your income by investing money.
You can read how you can start investing money in our next article: How to budget for your finances.