“Invest in Assets not in Liabilities” or “Assets will make you rich, liabilities won’t” and so on… We all have heard these sayings and every other rich person telling us the same thing. But, what exactly is Asset and Liability?
“Assets will create a positive cashflow and Liabilities will create a negative cashflow“, you’ll understand this statement very clearly, after a while.
Let’s understand Liability first, what exactly is a liability, for this let’s take an example, you purchased a high end car just to show off to your friends or people, lets assume you purchased it for 10L. Now, you’re using it just for showing off or having fun, in short no productive use of that car. (you think “oh, it is really cool to have this car and everyone want this”). But, you’re missing one very important factor which is “Real Cost“. That car is not costing you 10L alone. Let’s understand that, we will be focusing on three heads : Gas, Maintenance, Depreciation
- Let’s assume on an average you’re spending 1000 bucks for the gas every month, which will come out to be 12000 every year.
- Car also requires some maintenance also, for that you’re spending 5000 every 3-4 months, which will come out to be 15000 every year.
- Depreciation, for people who don’t know, it is just that you’re car which was worth 10L in the beginning, now it is not that much worth, it’s value is going down, if you ever plan to sell the car it will be less than the cost, which was 10L at that time.
If you see point number 1 and 2 and run the maths, you’re shedding 12000 + 15000 = 27000 bucks (real money) from your pocket. So, lets say you used that car for 5 years and then sold it, what was the the actual cost you incurred? it was = 10L for purchasing that car, and for the gas and maintenance = 27000 * 5 = 1,35,000 bucks. SO the Real Cost to own that car was, 11,35,000, where 1,35,000 was hidden. You sold that car for less than 10L, obviously you’re incurring a loss there too. Let’s come to the statement, stated above, “Assets will create a positive cashflow and Liabilities will create a negative cashflow”, we are talking about liabilities here, so look at that outflow of cash from your pocket is creating a negative cashflow and in the longer run you’re incurring loss.
Now, lets understand Assets, what exactly are they?, for this we’ll take an example which we took earlier for liabilities, but, here’s something is changed, now you’re purchasing the car to deliver the goods you are producing (let’s say you make detergent and then go out and sell it), but because of this car you can go out far and sell your product, so, this car helped you to grow your market and reach. So, this car is an asset for your company. In short this car is helping you to grow your business, and helping you to generate revenue.
The statement stated above “Assets will create a positive cashflow and Liabilities will create a negative cashflow”, here the car is helping you to generate revenue which means that a positive cashflow is there. There are number of examples which can come under assets and liabilities, we hope that now you’ll be able to segregate things before making an investment.
Bottom Line
Assets are something which will help to create more money, i.e., which will create a positive cashflow, cash will come into your pocket, you’ll get richer. But, in Liabilities, they will deplete your money, i.e., which will create a negative cashflow, cash will go out from your pocket.
Choose wisely. Invest Smart
