Assets are things that you own such as land, house, car, business, investments, tools etc. Each of these assets have a corresponding current value. Some of them may now be worth more than their original value and some of them may be worth less. Those assets that usually gains value over time are called appreciating assets while those that lose value are called depreciating assets. Examples of appreciating assets are real estate or stock investments that gained value over the years. Examples of depreciating assets are cars or appliances that lose value over the years. A real estate or stock investment can be appreciating or depreciating depending on the market condition so there really is no guarantee that an asset will definitely appreciate in value. All we can do is look at statistics and hope that the upward trend will continue.
Liabilities are what you owe from lending institution, a company or person. Examples of liabilities are balances you owe in your credit card, your mortgage payment for your house or your monthly payment for your car loan or your monthly bills.
Your net worth is the total amount of your assets minus the total amount of your liabilities. You want your assets to be worth higher than your liabilities because if your liabilities are higher then that means your net worth is negative. Having liabilities cannot be avoided by most people since it will be hard to pay cash for things that costs so much such as house and lot or car. It’s okay to have liabilities as long as the worth of your assets is higher so that if you have to sell them all for whatever reason, then you are not left with debt.
It is very important to monitor your assets and liabilities on a regular basis to know your current financial position and its trend. Having this information can give you a better understanding of your current state and help you make better decisions to achieve your goals.
Sometimes having liabilities can be good if you know how to leverage it. In fact it’s one of the investment strategies that I use and also being used by many investors. In one of my notes, I will discuss how to use leveraging to invest and make money from it.