Difference Between Asset and Liability

Difference between Asset and Liability
Before proceeding on our journey towards attaining personal freedom, I have to know whats my net worth. Now what is net worth. Net worth, for a company is total assets minus total liabilities. Cash flow refers to the amount of cash being received (positive cash flow) and spent (negative cash flow). Assets?? Assets are anything owned by me which can produce future economic benefit (monetarily). We have many types of assets like current assets, investments, fixed assets, intangible assets and other kind of assets like good will. Keeping all these classification aside, an item which generates a positive cash flow, is an asset. Liability are anything which we owe to others like loans, or like those activities which results in a negative cash flow. Lets look at some examples to clear this concept. For instance, I bought a car for 4 lakhs (assume we have bought with full payment upfront). So to use that car, I need to pay for the petrol, for maintenance, for accessories. These are all negative cash flow. The only positive cash flow would be the amount you can save if you had communted by auto/taxi/public transport, which I am sure would be -ve. This is not a good deal, its a liability. If it gives me an intangible advantage in the business I am in, then its an asset. So to say, I have bought a house with a monthly EMI of Rs 10,000 with a down payment of say Rs. 3,00,000. I am renting the house at Rs 8000 a month with a deposit of Rs 80,000 (10 x rent). So lets calculate the cash flow statement for a year (Assume a 4% interest rate) Cash Flow per year Positive Interest received on 80,000 @ 3200 (Taking only interest in calculation, since deposit has to be = 4% returned) Rent received 8,000 x 12 = 96000 Total = 99200 Negative EMI payable 10,000 x 12 = 120000 Interest lost on downpayment = 12000 Total = 132000
So Total cashflow is 99200 132000 = 32800. We have a negative cashflow of 32800. This means the house which we have bought is not an asset but actually its a liability. (Keeping aside the tax benefits) This example is to make the difference between asset and liability clear. People generally consider buying a house, car or a laptop as investment. Unless and until these articles generate a positive cash flow, its a liability. Do leave a comment, if anything is not clear to you. I would be glad to help you. Next Article: I will calculate my net worth and show you the need for calculating net worth. Stay with me in this journey. See you tomorrow.
How much are you worth?

In my previous post I explained about what constitutes assets and liabilities. In this post I will deal about Net Worth, how to calculate it and the need for calculating net worth. Want to know where you stand financially? Then calculate your Net Worth. As I explained in my previous post, Net worth is your total assets minus total liabilities So lets see where I stand financially. Assets: Investment in ELSS 15000 House Advance 13750 Cash 20000 Total 48750 Liabilities: Loans taken 0 Total 0 Networth = 48750 0 = Rs. 48750 Need for calculating net worth. I believe you would have heard about Intention Manifestation concept. In short
Whenever you want to set a new goal for yourself, start by setting it. Take the time to become clear about what you want, but then just declare it. Say to the universe, Here is the goal. Make it so. Do not ask the universe for what you want. Declare it. Dont ask. This is very similar to prayer, but you are not praying FOR what you want. You are praying WHAT you want. You are simply saying, Here it is. Make it so. It is like planting a seed in the ground. You do not say to the ground, Here is the seed. Please, can you make it grow? You simply plant the seed, and it will grow as a natural consequence of your planting and tending to it. It is the same with your intentions. Simply plant them. Theres no need to beg. Read about Intention Manifestation more at Steve Pavlinas blog By calculating Net worth monthly, you will slowly get the intention to increase your net worth. When this intention is firmly implanted in our sub-conscious mind, it will slowly manifest itself. So I would calculate my Net worth monthly. Next post: Setting financial goals
Setting financial goals

In a race, a person who runs a pre-defined length of space and in the shortest time, wins the race. Similarly, to find whether we have achieved our financial freedom, we need to set our financial goals. Setting a financial goal is not like, I would like to have 10 Lakhs in my bank account by the time I become 25 or so. It has to be calibrated to the current economic situation and it is also linked to the life style we live in and many factors like inflation and stuff like that. By achieve financial independence, I meant that I wont be working for money as such. So this means I should have sufficient money power (buying power) to lead the remaining of my life. Quite a big target. Assuming current inflation rate to be 6%. What does it mean? An item which costs Rs100 today would cost Rs106 a year after. So the buying power of the money reduces. So to retain the buying power of our money, we should also make our money grow by atleast 6%. Not a big deal to get that kind of return. But if we do only this then we wont be able to build assets and also beome financially free. So we need a higher rate of interest. I would discuss this in other post.
So coming back to the point, we should define our financial goals like this: 1. Long Term goal 2. Short Term goal Long Term goal is the amount of money which I would like to posses say after 10 years Short Term goal is the amount which I would need in a short period of time, say 1 year to 4 year. There would be many short term goals like buying a house, buying a car, buying a land etc But only one long term goal. So the only consideration for setting the financial goals is that the amount you set up for the long term goal should be sufficient to live the remaining life without giving up our lifestyle and the long term goal should not hamper our short term commitments.

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Difference between Asset and Liability

How much are you worth?

Setting financial goals

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