Telling Your Assets From Your Liabilities
Canada is said to have one of the highest rates of household debt. This is probably because, in addition to Canadians habitually spending money they don’t have, many people end up spending what they do have or borrow on liabilities instead of assets. The differences between assets and liabilities are rarely recognized by most people and this probably increases their chances of spending more on liabilities than on assets as well as losing instead of gaining money daily.
Everything you own could be either a liability or an asset, depending on its effects on your life and financial capacity at a particular point in time. Two simple ways to tell an asset from a liability include:
#1. Effect on Your Pocket
Assets are essentially money makers. They are generally items that serve as sources of extra income. This means that if anything you own is making money for you, it is an asset.
Liabilities, while they may be useful, are unfortunately not pocket-friendly. They are money takers and are usually incur added expenses.
For items that make and take money, their status is determined by subtracting the income generated from the expense incurred. If you make more money from the item than it costs, it is an asset whilst if you spend more money on the item than it makes, it is a liability.
#2. Value over time
Over a period of time, an item can either increase or depreciate in value. Assets generally are more likely to increase in value over time whilst liabilities are likely to decrease in value over time.
In the course of that period, how you handle the item also determines if it retains its status or changes i.e. if it remains an asset or becomes a liability and vice versa. Therefore taking care of things such as your land or building as well as putting them into good use is able to increase their value as well as keep them as assets
Conclusion
Spending more money on acquiring assets is a way of indirectly increasing your income. This is because, as said earlier, assets generally make money for you
Any item you own can be an asset or a liability. For instance, a blender you use to make smoothies for sale is more of an asset than a liability and an apartment building that has been empty for 2 years is more of a liability than an asset. Therefore, appropriate use of your belongings is important to your income and changing the status of your items from liability to asset is a smart and easy way to increase your net worth.
