How can we choose between Assets & Liabilities - Conceptual Theory

Conceptual Theory

I would say probably 95 percent of all college graduates do not know what a financial statement is. -  Young people like you there is six basic words to financial literacy and financial education. In addition, the six words again are income, expense, asset, liability. Therefore, these are the four words income, expense, asset, liability. Then the last two words are the words of cash flow. And that's, why the game is called cash flow and the secret to being rich is not a college education, but can you control cash flow. In addition, this is what cash flow in looks like. So this here you need this knowledge of  income, expense, asset, liability. First line of expense is tax, but this is a poor person’s cash flow pattern. It is not how much money you make most people you know they. If you what you have a PhD. or no school at all. They cannot control the cash flowing out through their expenses.

Assets Vs Liabilities

When we talk about an asset, the thing, which came to in our mind, is “treasury”. Assets is treated as a desired to purchase from a long term savings. Assets creates a feeling of willingness in the mind to own something. People has different perception regarding assets and its values. Some of them treat as a common object and some of them treated as a most precious thing. On the other hand, liabilities are the consequences of those assets, which has over-value in compared to income. It shown as supportive sources in need. We will discuss in detail below. What does it mean of “Over-Valued”?

We will discuss about the hidden truth between assets and liabilities. How can we choose between assets and liabilities? How the same assets will turned into liabilities? How can we manage between them?

 

What are assets?

The assets are those resources, which can easily convertible into cash and does not lose its value with respect to time. It has many definitions, which you can easily find in any book. When we think about assets then we compare it as a treasury, which will remain the same. Most kids do when they get pay raise and all that they buy themselves a bigger house, now my house is an asset. Who tells you that? Your real estate agent of course! - They want to give you this false sense of security while you are being screwed. - Exactly.  Know but when you look at what happens with the house. I mean a personal residence that you will live in the money comes in it goes out and this is middle class, but also goes out through a mortgage payments. If not, you still have taxes. Your house is not an asset because it is taking money from your pocket. So very simply said assets put money in my pocket, liabilities take money from my pocket. Then this here is, so I am not saying don't buy a house but here is a house that pay you inverse from a rent. Most of the people does not understand about this and make a bigger mistake.

 What are Liabilities?

 Liabilities are those expenses which occurred during the business operation and has to be paid within a given time periods. As we discussed above, liabilities are the consequences of those assets, which has over-valued in compared to income. Over-valued means it has a cost which above the budget of your income. Liabilities generate due to borrowing, certain needs, interest payment and so on.  There are two common types of liabilities: Current liabilities – Those liabilities that has to be paid within a year. Non-Current liabilities – Those liabilities that has to be paid in a long-term period. These liabilities has various effect, which hinder the budget of a person. Liabilities always target your saving and tends to decrease your income. Usually, business used these liabilities to expand their business. However, continuous increments in liabilities may fall the profitability in the business. 

Now you can see “How the same assets will turned into liabilities”

 

Let us suppose you own a house which worth 80 Lac. You have a salary of 1 lakh per month. You applied for home loan from a bank. Bank granted you a loan with certain rate of interest (EMI). EMI is 45 K. Instead you have own personal expenses. At last, you will save only 30K. You will have a kids also and their expenses too. You will either take a loan or purchase a credit card to manage all these expenses. I hope that you can understand that how one asset is increasing the proportion of liabilities indirectly. It has a multiplier effect and damage yours saving in the long time.

Differences Between Assets & Liabilities

If you have a job, you pay tax, but the rich get richer because when you have asset, income taxes are less. You can get it down to zero if you want. But that's financial intelligence, but can you control cash flow. Assets put money into your pocket; liabilities take money out of your pocket. Therefore, as a young person you just focus on that so when you buying a new house, you are going to say is this going to take money or put money? You buy an apartment house is it going to take money or put money that is it, its cash flow. Six most important words for financial intelligence and IQ is income, expense, asset, liability, but it is really cash flow. Now if I could bring up amore horrible subject is, do you think people can be assets or liabilities? - I think they could be both, to be honest. So for most young people they fall in love, they get married, they have kids. Is a child an asset or liability? - A child is definitely a liability. I am not saying do not have kids, but you got to think the kid is expensive and they don't get cheaper. They get more expensive every year, you know then they go to college and then it gets even more expensive. Therefore, a human being now this sounds horrible to all those socialists and communists out there, but the fact is kids cost money. But as an old guy, I want you to think about this as I get older as people get older family members become liabilities.

Conclusion

So as a young person or if you are old, financial intelligence is the ability to control cash flow. Moreover, that is what they do not teach you at school. They tell you to go to school, get a job. First thing is tax you know, you will pay most of your money will go out through taxes, in your lifetime. Then they tell you to buy a house, a car. Cars an asset, no cars a liability. You got insurance, gas, upkeep, and all this. Now if you buy a, a taxi car it could be an asset, its cash flow. And that's very simply it, so this is a poor person. Money goes out there's a lot we, we just interviewed some national football league players who make millions of dollars in their 20s. And most of them are broke in two years because they can't control cash flow. Intelligence IQ is can you control cash flow not your college degree. College degrees are important, but they are not going to teach you this. So the cash flow game, trains you over and over and over again to get your money in here to get the cash flow this way.