Assets and Liabilities - The Two Starting Points for Effective Financial Management

The long overdue post on Assets and Liabilities as I’ve mentioned from the How to Calculate Net Worth discussion.

The foundation of financial wisdom for anyone will always be the basic accounting equation: equity or owner’s equity equals asset minus liability.

Assets are what you own - regardless of the manner you’ve acquired them. Liabilities are what you owe - regardless of whom you owe them to and again, the manner you’ve acquired them. Owner’s equity is what’s left of your assets when the total value of your liabilities has been taken out.

Personal assets can be acquired by your own money or borrowed funds. Assets increase when you earn more money or something with value like cars, homes, equipment, and jewelries. Personal assets decrease when your liabilities increase. When you borrow money, you obtain a debt or liability.

School loans, credit card debt, and mortgages are all good examples of liabilities. Your savings, properties in your name, and the cash in your wallet are all good examples of assets.

Obviously, life will be much better if you have more assets than liabilities. You can do this in various ways. Work hard to earn more money, and make sure you spend less than you earn. Lead a financially practical lifestyle. Avoid using your credit card for the wrong reasons. The same goes for taking out any kind of loan – do so only when you truly need it. And lastly, make money work for you to increase your assets: know when, where, and how to invest your money profitably.

You could receive other more seemingly complex tips for managing your finances, but all of them will still surely boil down to the basic accounting equation we’ve started with: equity equals asset minus liability.

Tags: asset, liability