“An asset puts money in your pocket and a liability takes money from your pocket…” – Robert Kiyosaki
“In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).” – Wikipedia
Now, which of the above two statements do you agree with? Confused?
Let’s clarify matters. Try to tick off the categories applicable to the Statement of Assets, Liabilities and Net Worth (SA-L=N) items in the table below:
Item Can be sold for cash Can put money in your hand
House □ □
Car □ □
Jewelry □ □
Home appliances □ □
Stocks □ □
Bonds □ □
Real estate □ □
Pooled funds □ □
Credit card debt □ □
Personal loans □ □
Vehicle loans □ □
Housing loans □ □
By Wikipedia’s definition, all of the SA-L=N items above can be sold for cash. And by Kiyosaki’s definition, all of the items can put money in your hand because all of them can be sold for cash, used for a business to earn money or are in themselves already investments that can produce returns. Even the debt/loan items can be used as leverage for buying investments.
Financial planners know that personal finance deals with total portfolio management where all of the assets and liabilities of a household are used to generate a brighter future.
But the title of this blog is about the thin line between investing and spending. When does an asset item in the SA-L=N become an investment and when does it turn into mere spending. The answer lies in the purpose for which the asset was purchased.
If the intent was to buy an asset for one’s own use / consumption, then that asset can be considered a non-earning asset borne out of mere spending. But if the asset was acquired for the purpose of making money out of it then that asset becomes an earning asset or an investment.
A house that is used for a family’s sole use is a non-earning asset but an asset nonetheless. There are immense, unquantifiable benefits to owning one’s home. There are also benefits to owning a car for personal use even if it merely depreciates.
So please note that the durable things you buy (i.e. things that last for a long-period of time) can still be considered assets. But they can only be classified as investments or earning assets if you have the intention of making money on them. Otherwise, they are classified as non-earning assets borne out of spending. And generally speaking, for a household to ensure a brighter future for itself, it must have at least 50% of its total assets as earning assets.
How much of earning assets do you have in your SA-L=N?
Photo source: www.galloconsulting.com
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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