Assets and Liabilities
Before understanding the assets and liabilities, let’s understand this quote by legendary investor Warren Buffett, “Price is what you pay, Value is what you get”.
Whenever we buy something, that particular thing has some price and value.
For instance, we have bought a car for $13,000. That means the price of a car is $13,000. On the other hand, the luxury, comfort, and social status we get is the car’s value. As consumers, we generally don’t have a habit for analyzing the actual reason for buying any product or service.
If the goods and services you buy help you make more money, that specific thing is an asset. Or we can say when the value of a product increases over a long time; it is called an asset.
For example, when we buy a real estate property, the value of that property will increase in the long run. Also, when we invest in the equity market, the purchased portfolio’s value will increase in the long run. So, generally, these are examples of assets.
When the value of any goods and services decreases after buying or after a long time, it is considered liabilities. For example, when we buy a smartphone worth $500, the smartphone’s value decreases a minimum of 10% when we unbox our smartphone. That means if we want to sell our smartphone just after a few days of using it, we will only get $450, and if we use it for 1.5 years, and then we want to sell our phone, we will get less than $300.
If a photographer wants to start a photography business, he’ll buy a DSLR camera worth $1,000, and he is opting to make $1,000 from that purchase. The DSLR would become a liability for the people who don’t want to start a photography business or who don’t want to make a career in photography.
Why? Because after buying that camera, the value started decreasing as the DSLR camera is a liability. On the other hand, this photographer will make $10,000 Rs from investing his $1,000. For him, the DSLR will become a depreciating asset, but at the end, he is going to make 10X of the initial investment. That’s why it will become an appreciating asset for him.
That’s how you need to figure out which are appreciating assets for you and which are liabilities. In the next chapter, I have added an assignment so that I make sure you actually understood the concept. LIST: Car, Bond, Real estate, Equity, iPhone, House, Commodities, Bank loan, Patent.