In the light of our recent articles about cars, let’s take a moment to explain the difference between liabilities and assets. It’s really important to figure this out before you start with big purchases. The clearest example for this is buying a brand new car vs buying an appartment to live in.
To notice the difference between these two just take a look at the costs and potential profits after buying it. The price of a new car drops by around 60% in the first 5 years. This means that even without looking at possible repair costs, insurance and gas money the car already has put a significant pressure on your budget. There is nothing wrong with enjoying a purchase, but keep your expenses at bay.
Debt is one person’s liability, but another person’s asset. – Paul Krugman
The best example of an asset is buying an appartment or house to live in. You will have a lot of additional costs like water and electricity, but these costs are a means to an end. It allows you to live on your own while paying of your debt to obtain the asset for yourself.
For explaining the difference between an asset and a liability the best example is taking a look at an rental appartement. People owning an appartment who rent it out have it as an asset. The ones renting the appartment have it as a liability, they are never making money from living there. With this example you can use it to your advantage and focus on obtaining assets instead of liabilities.
The more assets you attain versus your liabilities the better your balance will look. This starts by thinking twice before buying a new car or renting a place.