We tend to think of ‘assets’ and ‘liabilities’ as being lofty accounting terms that don’t apply to us; people who only have their personal finances to think about. However, the truth is that assets and liabilities are relevant for everyone, and they have a massive impact on your overall financial health.
Also known as ‘profits’ and ‘losses’ in the business world, an asset is generally anything that brings money in and a liability is anything that takes money out. They impact the overall value of your estate in the sense that having too many liabilities could bring your net-worth into negative values.
A good way to think of an asset is something that perhaps increases in value over time, or could be worth something when sold. This could be anything from a house to a car or a bicycle.
However, in personal finance as opposed to business finances, the line between what is an asset and what is a liability is less defined. For example, a house can be an asset, owning one most likely makes up a huge chunk of your net worth. However, a mortgage is a liability, what you own against the house, so the worth of your home is it’s total value minus the loans that have been taken against it.
So, let’s dive into some examples of what could be considered ‘assets’ for the average person:
As you might expect, there tend to be more liabilities than assets in the average person's financial portfolio. It may be beneficial to think of a liability as a recurring yet often unavoidable cost. Here are some examples:
With this in mind, liabilities aren’t necessarily ‘bad’. In the case of student loans, you are investing into a future which will hopefully increase how much you’re worth overall. And with subscriptions, you are paying for something you enjoy, which is always a positive. As for mortgages, the money you feel like you’re losing each month goes towards helping you own more of your home. In this sense, some liabilities can also be a positive investment too.
Hopefully now you feel more acquainted with what assets and liabilities are and how they have relevance in your everyday life. Auderli is here to help you organise your finances and important documents in one place, and to let you take control of your financial wellbeing.