Understanding the comparison between an asset and a liability is of
prime importance in today's world where every one is in the race of
increasing wealth. The explanation in this article will help you
understand things clearly.
Being aware of one's assets and liabilities is essential for all of us. This can help us in judging our financial position. At the time of taking credit from banks and financial institutions, what the lenders will consider is whether your liabilities are in complete control and you have substantial assets which can be used as collateral. The information given below will help you know the exact difference between the two.
Comparing Assets and Liabilities
The day people start earning, they are advised to start accumulating assets and have a strict check on the liabilities. Assets are those things which help you earn cash whereas liabilities are those purchases for which you have to make regular payments. Some objects included as liabilities can turn into assets in certain situations. The best example for this is a home bought with a bank loan. On your home loan, you pay the monthly installments and hence there is out flow of money In this particular case, the home would be considered as a liability for the person. In another case, let us assume that a person is an owner of a home and he has decided to rent his home to someone for a fixed rent every month. This means that the owner would be making a certain amount in cash every month and this will add to his total monthly income. This added liquidity makes the home an asset for the person. So, the situation and circumstances can convert an asset into liability and studying these circumstances carefully is essential or proper financial planning or financial management.
The comparison of assets and liabilities suggests us that the total amount of assets should always be higher than that of the liabilities. By following this rule, people would be able to stay in a good financial health. You should also be aware of which assets can give you the maximum returns and help you increase your net worth several times. Over the years, it has been observed that stocks of bluechips have given over hundred percent appreciation to investors having a long-term investment horizon. So, stocks would definitely top the high return assets. At the same time, they would also be called the high risk assets since stock prices are fluctuating and can give huge losses in times of market crashes. So, the stocks would be a good asset class for the investors who can take more risks and have the ability to bear losses at times.
Mutual funds are known to be the finest assets a person can possess over the years. Mutual funds are available in different formats and can be safe investment bets due to their diversified nature and proper management by fund managers. Again, there are types like high risk high return or low risk low return fund which investors can think of while putting in their money. Bonds, which are loans forwarded to corporations for their expansion plans are also an excellent example of long-term assets since the returns for bonds are enjoyed by the investors for many years. While cash can be the biggest liquid asset a person can have, rentable properties, gold and silver and bank savings and deposits are also assets which one cannot ignore.
Credit cards, loans from banks, car for self use are some common liabilities for people. In today's times, taking right decisions regarding asset acquisition and maintenance can benefit an individual to a great extent. So, hoping that this article has helped you to know these concepts well, I would like to sign off here. Good luck!
By Charlie S
Last Updated: 9/20/2011
Read more at Buzzle: http://www.buzzle.com/articles/asset-vs-liability.html
Being aware of one's assets and liabilities is essential for all of us. This can help us in judging our financial position. At the time of taking credit from banks and financial institutions, what the lenders will consider is whether your liabilities are in complete control and you have substantial assets which can be used as collateral. The information given below will help you know the exact difference between the two.
Comparing Assets and Liabilities
The day people start earning, they are advised to start accumulating assets and have a strict check on the liabilities. Assets are those things which help you earn cash whereas liabilities are those purchases for which you have to make regular payments. Some objects included as liabilities can turn into assets in certain situations. The best example for this is a home bought with a bank loan. On your home loan, you pay the monthly installments and hence there is out flow of money In this particular case, the home would be considered as a liability for the person. In another case, let us assume that a person is an owner of a home and he has decided to rent his home to someone for a fixed rent every month. This means that the owner would be making a certain amount in cash every month and this will add to his total monthly income. This added liquidity makes the home an asset for the person. So, the situation and circumstances can convert an asset into liability and studying these circumstances carefully is essential or proper financial planning or financial management.
The comparison of assets and liabilities suggests us that the total amount of assets should always be higher than that of the liabilities. By following this rule, people would be able to stay in a good financial health. You should also be aware of which assets can give you the maximum returns and help you increase your net worth several times. Over the years, it has been observed that stocks of bluechips have given over hundred percent appreciation to investors having a long-term investment horizon. So, stocks would definitely top the high return assets. At the same time, they would also be called the high risk assets since stock prices are fluctuating and can give huge losses in times of market crashes. So, the stocks would be a good asset class for the investors who can take more risks and have the ability to bear losses at times.
Mutual funds are known to be the finest assets a person can possess over the years. Mutual funds are available in different formats and can be safe investment bets due to their diversified nature and proper management by fund managers. Again, there are types like high risk high return or low risk low return fund which investors can think of while putting in their money. Bonds, which are loans forwarded to corporations for their expansion plans are also an excellent example of long-term assets since the returns for bonds are enjoyed by the investors for many years. While cash can be the biggest liquid asset a person can have, rentable properties, gold and silver and bank savings and deposits are also assets which one cannot ignore.
Credit cards, loans from banks, car for self use are some common liabilities for people. In today's times, taking right decisions regarding asset acquisition and maintenance can benefit an individual to a great extent. So, hoping that this article has helped you to know these concepts well, I would like to sign off here. Good luck!
By Charlie S
Last Updated: 9/20/2011
Read more at Buzzle: http://www.buzzle.com/articles/asset-vs-liability.html
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