21 Jan Asset & Liability
Initially thinking if I should write a page about his as it can be found the first thing when you read about financing. However, after reading much and watching much I realized there are different version and definition and a lot of discussion/argument about the definition. Is house an asset or liability? How about cars? Collectibles? So I will start by giving my definition what an asset or liability is to me:
Asset = It puts money into my pocket
Liability = Takes money out of my pocket
As most of you are aware the more asset you have, the chances of being financial free are higher. And the more diversified you are, you can diversified your risk as well. What I meant by diversifying is across different assets and not within the same class. For example, some of the people were saying I have diversified my stocks across different countries & across different sectors. Yes its good but to me, it still falls under the same class. Diversification should include all different class of assets too.
There are 4 different asset class:
1) Paper (Stocks, bonds, mutual funds, units trust, ETFs & REITs)
2) Business (Either your own start-up or purchasing a business from the market)
3) Real Estate (Either for rental or flipping. Highly utilizing the OPM leverage)
4) Commodity (Gold, silver, copper, raw materials)
Its not about “purchasing” liability but instead what are the things in your life are a liability to you. Example a credit card debt, buying “things” to support your lifestyle, you know what I mean. As each of us grow our income, it is naturally that we upgrade our lifestyle too and where more and more of these “things” comes in and will slow down our financial freedom.
So back to my initial point and for you to reflect for every purchase that you make.
1) Is purchasing a car an asset or liability. Answer : It depends of the usage. If you are purchasing a family car or for your own use, it is categorized as a liability as you need to pay installment every month. However, if you purchase it for renting out or to be used as grab that could be an income to you
2) Is purchasing a house an asset or liability. Answer : You are right. It depends of the usage. If you purchase for your own stay, this is a liability but if you purchase it for rental purpose or any other investment that brings you income it can be categorized as an asset.
Each of us purchase asset for different reasons and you can view them in my previous blog post. Therefore, you start making any purchase thing about if it you are purchasing an asset or you are adding more liabilities into your life will impact your personal finance. I have met a lot of people which is doing great all the while but just 1 bad decision, you are stuck for it for years.