Assets, liabilities and what happens to your money

The simple difference

An asset is something you own that has value, like savings, shares, a car or a home. A liability is something you owe, like a mortgage, credit card balance or personal loan. That’s the usual accounting meaning, even if a book describes the ideas differently.

It helps to look at both. If your home is worth A$650,000 and you owe A$450,000 on the mortgage, the home is an asset and the loan is a liability. The difference is A$200,000 in equity, before selling costs.

The useful idea from Rich Dad Poor Dad

Robert Kiyosaki puts it this way in Rich Dad Poor Dad:

“An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.”

That is a handy way to think about cash flow, but it is not how accountants define assets and liabilities. A home does not stop being an asset because you pay rates and maintenance. And a rental property can lose money even though you collect rent.

Use the book's idea as a prompt to ask: is this bringing money in, taking money out, or both? Keep the proper definitions when working out what you own and owe.

Tap through everyday examples

Pick one. Each example shows the asset or debt, plus the money that goes in and out. No test, just the picture.

A better question than “is it an asset?”

Ask four things before spending: What will it cost upfront? What will it cost to keep? Does it produce income or save time? Could I sell it later, and for how much?

A car you need for work may help you earn an income even though it costs money to run and usually falls in value. A laptop could be worth buying for a side business even though it might not earn anything directly.

Use both net worth and cash flow

Write two lists: assets you own and debts you owe. The difference gives a rough snapshot of net worth. Then make a separate monthly list of money coming in and going out. You can have a valuable asset, such as a home, and still struggle with repayments or upkeep. You can also have modest assets and healthy cash flow.

Looking at both views is more useful than trying to force every purchase into “good asset” or “bad liability”.

Try this

1. Write down what you own, including your bank accounts and super.
2. Write down what you owe, such as loans and credit cards.
3. Subtract what you owe from what you own to estimate your net worth.
4. Look at monthly income and spending separately. A rising net worth and healthy cash flow are related, but they are not the same.

Want help with the cash flow part? Try our payday planner.