Assets vs Liabilities: What are they? (Plus 7 examples of assets you can own!)

One of my favourite books about personal finance is Rich Dad, Poor Dad by Robert Kiyosaki. I won’t spoil it for you, but if you want to understand more about money, how it works and how you should think about it, I’d 10000000% recommend you read it.

[Full disclosure: if you make a purchase via the link above, I’ll receive a little bit of compensation from Amazon. It’s no extra cost to you and it helps keep this blog up and running!]

Anyway, in this book Kiyosaki makes the distinction between an asset and a liability, and how the rich think about them vs how the poor and middle class think about them.

This topic is something that you MUST understand if you want any chance of managing your money better, and I feel it’s one of the most overlooked, but important topics in money management. 

So in this post I’m going to try and help de-mystify assets and liabilities, and help you understand what is an asset, why you should have more of them, and how you should have more of them.

Whats is an Asset and what is a liability?

In short, an asset is something you buy that produces income for you.

On the other hand, a liability is something you buy that doesn’t produce an income for you, and you actually need to spend your income on it to maintain it.

Now, I’m going to say something very controversial here, and something that not everyone agrees with.

YOUR HOUSE IS NOT AN ASSET.

Bare with me whilst I explain.

Remember we said an asset is something you buy that produces an income for you? So if you buy a house, you live in it and it doesn’t put money in your bank account every month, then that means it isn’t an asset.

In fact, it means your home is a liability because you have mortgage payments, utility bills and maintenance costs.

You have to spend more money to maintain it than you’re getting in return. 

Your home is eating up your money every day, but not giving you anything back. 

And yes, in the future your home might be worth more than you bought it for (this is called a Capital Gain). But for the 20 years that you own it (actually, you don’t really own it if you have a mortgage, the bank owns it and you’re kind of ‘renting’ it from the bank), it’s a liability that’s just eating away at your pay cheque. 

Now, let’s flip it around.

Say you own a house BUT you rent it out instead of living in it.

And the amount you rent it out for covers your own rent, the monthly mortgage payment, bills, maintenance costs AND leaves you with a bit leftover at the end of each month.

THEN you can say your house is an asset because it gives you an income (as well as covering some of your expenses).

It’s controversial because many of us believe that if we own our own home then it’s an asset. Not only that, but there’s an emotional attachment when we buy a home and many people dream of owning their own home.

But the simple fact of the matter is, it’s not an asset as long as it’s not making you any money.

Why do I need income-producing assets?

Having assets which provide you with a monthly income aside from your job can mean you are more financially free than most people. 

It can even mean that you don’t need a normal 9-5 job if eventually your income-producing assets start earning you more than your job. 

It could also mean that you’re able to do more of the ‘fun things’ in life since it’s extra income-on-the-side.

Money from income-producing assets can also be re-invested to utilise the power of compound interest, meaning you’re money will work for you instead of you working for money. 

But the main reason I truly believe that everyone should have multiple income-producing assets is security. Security that, even if you lose your job, you’ll still have money coming in each month from different avenues. 

How can I have more income-producing assets?

All income-producing assets require an investment of some sort and so, as always, with investment comes risk. 

It depends what assets you buy as to how much risk there is, but usually the more the risk, the more you get back. 

But I believe everything comes with a risk. For example, buying a new dish at a restaurant is a risk because I might not like it. And if I don’t like it, then I feel I’ve lost money. If I do like it then amaze-balls! because I feel like it was worth it.

And in fact, you can invest in income-producing assets for as little as £25.

NB: you should never invest more than you’re willing to lose (and this is usually around 10% of your income). 

So what types of income-producing assets are there?

1. Rental properties – renting your property out (but make sure the rent covers all expenses!). This can be your home, but can also be commercial property like shop space, and even garages! 
2. Stocks and shares – investing in the stock market, specifically in companies that give you a dividend every month, quarter or 6 months. 
3. Real estate investment trust aka REITs – this is essentially pooling your money with other people to buy properties together, and then getting an income from renting it out. This is completely managed via another company.
4. Peer-to-peer lending or Crowdfunding- lending money to small businesses and start-ups and getting repaid (with interest) on a frequent basis. 
5. Government bonds – lending money to the government and getting repaid (with interest), usually every 6 or 12-months.
6. Corporate bonds – lending money to a company and getting repaid (with interest) on a frequent basis.
7. Royalties – a more creative way of getting monthly income by putting your assets like pictures, music you’ve produced etc, up on a stock website and getting paid every time someone buys/uses it. 

 

Do you have any questions? Comment below!

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