We all know the accounting meaning of asset and liability but when it comes to Financial/Investment world the real meaning of Asset and Liability Changes!!
Below we have explained it with the help of a small example!!
Son: Dad, may I speak with you?
Dad: Go ahead.
Son: Among all my classmates, I am the only one without a car. It is embarrassing.
Dad: What do you want me to do?
Son: I need a car. I don’t want to feel odd.
Dad: Do you have a particular car in mind?
Son: Yes dad (smiling)
Dad: How much?
Dad: I will give you the money on one condition.
Son: What is the condition?
Dad: You will not use the money to buy a car but invest it. If you make enough profit from the investment, you can go ahead and buy the car.
Then, the father gave him a cheque of Rs 500000. The son cashed the cheque and invested it in obedience to the verbal agreement that he had with his father.
Some months later, the father asked the son how he was faring. The son responded that his business was improving. The father left him.
After some months again, the father asked him about his business again and the son told him that he is making a lot of profit from the business.
When it was exactly a year after he gave him the money, the father asked him to show him how far the business has gone. The son readily agreed and the following discussion took place:
Dad: From this I can see that you have made a lot of money.
Son: _Yes dad. _
Dad: Do you still remember our agreement?
Dad: What is it?
Son: We agreed that I should invest the money and buy the car from the profit.
Dad: Why have you not bought the car?
Son: I don’t need the car again. I want to invest more.
Dad: Good. You have learnt the lessons that I wanted to teach you.
– You didn’t really need the car, you just wanted to feel among. That would have placed extra financial obligations on you. It wasn’t an asset then; but a liability.
– Two, it is very important for you to invest in your future before living like a king.
Son: Thanks dad.
Then the father gave him the keys of the latest model of that car.
1. Always invest first before you start living the way you want.
2. What you see as a need now may become a want if you can take a little time to get over your feelings.
3. Always create assets for yourself at an early age so that you can enjoy the power of compounding.
4. Try to distinguish between an asset and a liability so that what you see as an asset today will not become a liability to you tomorrow.
Those who are interested to learn more must read the book Rich Dad Poor Dad by Robert Kiyosaki!!