To make an Asset,
We first should know about what an Asset is !
There are lots of definitions all over the internet on Assets and its types. But those are out of my understanding. I am not an Accountant to understand any of those. Neither am I planning to be one. Instead, I am a capitalist who knows how to make money and assets.
I have understood the meaning of Asset and liability through experiences of my own and of my rich friends and relatives.
Asset is something you own that gives you something.
On the contrary Liability is something that takes from you something.
That might sound twisted but it is the easiest way to understand it. I will explain it with an example.
Situation: You purchased a flat for 70,000 $ (5000000 INR) in some city to put it on rent, hoping to earn some passive rental income. For that you took the loan of 40,000 $ (3000000 INR) for 30 Years. As per present Rate of Interest your EMI will be around 350 $ (25,000 INR).
Now to check if it is an asset or not let’s take 2 scenarios:
- The rent you are getting from the flat is same or more than that of EMI (>350 $ (25,000 INR))
- The rent of the flat you are getting is less than that of EMI (<280 $ (20,000 INR))
In First Scenario,
You have made an asset as it is giving you some return from the asset you made and your money worked for you to give you more money.
Now the tenants are paying your liability of 40,000 $ (3000000 INR) in the span of 30 years and even if that area’s flats prices will not increase you will still be getting 40,000+ $ (3000000 INR) profit on the investment of 28000$ (2000000 INR). That’s turn out to be 5% annual return on your investments. This is not that much good return, but here I have taken the worst scenario of no increase in the property price. Even in the worst scenario you are getting the returns. That’s a win-win situation.
In Second Scenario,
You have made a Liability, as money is taken from you.
Here the rent of the property is suppose 200$ (15000 INR) per month that means you have to pay the remaining EMI of 150$ (10,000 INR) per month for next 30 years, which turns out to be 50000$ (3600000 INR) after 30 Years. The situation stands same no rise in the real estate prices. You ended up giving 8350$ (600000 INR) or in the liability terms 8350$ are taken from you.
It is simple, I will repeat again,
Asset is something that gives you something.
Liability is something that takes from you something.
The Point arises here is how to check if something is an asset or a Liability?
Checking it is a very simple as well. Just take a page divide it in 2 parts by marking a line in centre. Write Giving on one side and taking on other side as it is shown in table below
Write down everything that the thing you want to check will/can give you in terms of time, money and efforts.
|Write down everything that it will/can take from you in terms of time, money and efforts.|
|Do the giving total here||Do the taking total here|
Now Subtract Taking from Giving (Giving-Taking). If it comes out to be a positive number then it is an Asset. Otherwise it is a liability, even if it turns out to be a ZERO.
We have only discussed about what is an asset and what is not. What is considered to be a good Asset, what is not, that we will discuss in later posts. Here, we have tried to identify an asset first.