Posted by André Nosalsky :: February 18, 2008 @ 4:55 am

One way to think of assets and liabilities is as vehicles or containers. They are either positive or negative. The positives are the assets, where you can build them up and they will bring more money into your life, while the negatives, which are the liabilities, require you to pay them and thus they are siphoning money away from you.

Assets – Assets are anything that brings money into your financial system once all of the expenses are counted. In this interpretation, a vehicle is not an asset because it takes money away from you each month, even if you have it fully paid off (because you still incur gas, insurance, maintenance and parking expenses). A rental property is an asset if you own it and it brings a net income every month to you. Money you lend out on person-to-person lending sites counts as assets also.

Assets can be broken down into two categories:

• Liquid Assets – If an asset can be turned into cash in a week or less with a minimal amount of loss of the asset, then it is a liquid asset. Checking and savings accounts, many mutual funds, and CDs are all examples of liquid assets.

• Non-Liquid Assets – These are assets that are not easily convertible to cash within a reasonable time period. A rental house, a business you own, and stocks in a startup are examples of non-liquid assets.

Liabilities – Liabilities are anything that takes money away from you, which is the outflow of money from your financial system. The official definition of a liability is: a financial obligation, debt, claim, or potential loss. The goal is always to minimize or eliminate as many liabilities as possible to keep the money for yourself and build up your assets.

Let’s look at the type of liabilities anybody out there can face:

• Permanent Liabilities – Taxes, groceries, utility bills, and transportation costs are examples of liabilities that cannot be eliminated. These liabilities will be with us for as long as we are part of this world. But they can be managed and optimized so you are paying as little as possible.

• Temporary Liabilities – These are expenses that have a deadline. Paying off your car, paying off your credit cards, and paying off anything else that takes money away from you each month is a temporary liability. You can choose to pay more towards it every month and there’s a date by which you will have paid the liability off.

Understanding that everybody has assets and liabilities in their lives and knowing how they work will help you to begin to lower or eliminate your liabilities and increase and acquire more assets.