This is one of those tests where the answer is so obvious that you begin to question it. But, on the road to a debt-free lifestyle, you should probably know the difference between an asset and a liability. Why should we know the difference? Well, most financial planners would suggest that we pay cash for liability and can finance (or leverage) an asset.
Let’s start off with some fairly easy ones… or are they?
Credit card? Liability? Some may argue that their 5% back card actually pays them because they pay off their cards every month.
Automobile? Liability? After all, like anything mechanical, it wears down and thus depreciates. But what about maintained or restored collectibles?
Collectibles, such as art, coins, stamps, or baseball cards? Liability or asset? Most would probably guess an asset. But what if the collectible was damaged or public interest in that particular asset has dropped? Your collection could become a liability.
Stocks? Asset or liability? Like collectibles, the value of the stock can go in either direction. Rather than call them a liability, most would call them an underperforming asset. Your primary residence? If you read any of Robert Kiyosaki’s Rich Dad Poor Dad books, which I’d recommend, you’d know that he says that this is a liability because cash flows away from your bank account instead of into it. But couldn’t that be said about most assets? For the most part, there has to be an investment made, therefore cash would flow from your bank account
