There are many investments you’ll make in your lifetime, some of them worthwhile, others not so much. It seems reasonable to assume that well-chosen investments are assets, and their poorly performing counterparts are liabilities.
We asked experts to clarify, and to explain the differences between the two.
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Assets and liabilities: What they are and the differences between them
Johann Rossouw, certified financial planner at Fiscal Private Client Services, explains, “An asset is something that you own that can provide you with a future economic benefit. A liability is something you owe to someone else.”
Darko Marinkovic, corporate finance associate at NSDV, elaborates by saying, “Assets are positive and increase economic value, whereas liabilities are negative and reduce economic value.”
“In short, assets put money in your pocket, and liabilities take money out of your pocket,” Rossouw says.
How are they related?
Marinkovic offers an interesting perspective on the relationship between assets and liabilities.
“They are two sides of the same coin,” he says. “If two parties entered into a loan agreement, the lender would have an asset and the borrower would have a liability.”
“The circumstances that would create a liability for the borrower are the same circumstances that would create an asset for the lender, i.e., the obligation to repay the loan, which makes it a liability, and the right to receive the proceeds of loan repayment in the future, which constitutes an asset.”
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What are some examples?
Rossouw says, “Examples of assets include your home, a share portfolio, or your retirement fund. The expectation with these examples is that you can reap some future economic benefit – you can either stay in your home, or your share portfolio can go up in value.
“Examples of liabilities include personal loans, credit cards, mortgages, or an overdraft facility with the bank. With these examples, you pay money to someone else, whether it be an individual or a bank.”
Marinkovic uses the example of buying a house using a mortgage bond to illustrate further.
“You borrow money from the bank and buy a house, repaying the mortgage bond over time. You reap the economic benefits of owning that house by charging rent to tenants, or later on, selling it. The mortgage bond is therefore a liability, and the house is an asset.”
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