Is your phone an asset? What about a car, or a house? The answer depends on which definition you use. In this lesson of Mondosol’s Make Money course, Kofi explains the difference between assets and liabilities, shows you how to work out your own net worth, and why the things you own can either feed your wallet or drain it.
Read the article, watch the videos, or press play and listen.
In this article
Two definitions of an asset
The accounting definition
In accounting, an asset is anything you own that has value: cash, savings, a bike, a car, a house. A liability is money you owe: a loan, a credit card balance, a phone you are still paying off.
The cash flow definition
Rich Dad Poor Dad uses a simpler, stricter test: an asset puts money into your pocket, and a liability takes money out. With this test, a car you use every day is not an asset, because it costs fuel, insurance and repairs.
Both definitions are useful. The accounting one tells you what you are worth today. The cash flow one tells you which way your money is moving each month.
Everyday examples
| Thing | Has value? (accounting) | Brings money in each month? |
|---|---|---|
| Savings account | Yes | Yes, a little interest |
| Fund or shares | Yes | Can grow and pay dividends |
| A flat you rent out | Yes | Rent, minus loan, costs and repairs |
| Your own home | Yes | No, it has monthly costs |
| A car for daily use | Yes, but falls in value | No, it has monthly costs |
| A credit card balance | No, it is money you owe | No, interest takes money out |
Your personal balance sheet and net worth
Your net worth is everything you own minus everything you owe. Here is Kofi’s friend Jonas (made-up numbers):
| What Jonas owns | Value | What Jonas owes | Amount |
|---|---|---|---|
| Savings account | 20,000 kr | Phone still being paid off | 4,000 kr |
| Fund | 15,000 kr | Credit card | 6,000 kr |
| Bike | 3,000 kr | ||
| Total owned | 38,000 kr | Total owed | 10,000 kr |
Net worth = 38,000 kr − 10,000 kr = 28,000 kr. If Jonas pays off the card, his net worth does not change on the day he pays (cash goes down, debt goes down), but he stops paying interest, so more money stays with him every month after that.
A closer look: the car and the home
A car can be very useful, and sometimes it helps you earn money by getting you to work. But it usually loses value every year and costs money every month. That does not mean “never buy a car”; it means buy the car you need, not the most expensive one you can borrow for.
Your own home is more complicated. It costs money each month, but you have to live somewhere anyway, and over many years a home may gain value. Whether buying is a good idea depends on prices, interest rates and your situation.
Good debt and bad debt?
- Debt that can help: borrowing at a reasonable rate for something that is likely to raise your income or value over time, such as education or a sensible home loan. It still carries risk.
- Debt that usually hurts: high-interest borrowing for things that lose value fast, such as clothes, gadgets or holidays on a credit card.
- A simple rule: before borrowing, ask “will this put money in my pocket, or take it out, over the next few years?”
Watch: assets vs. liabilities
Video: “Assets vs Liabilities: Understanding Your Financial Health” by Money Instructor, on YouTube.
Video: “Assets vs Liabilities for Beginners (Personal Finance) Net Worth, Cash Flow + Good vs Bad Debt” by Explain it to me, on YouTube.
Try it: Kofi’s balance sheet challenge
- Draw two columns: “What I own” and “What I owe”.
- List everything with a rough value. Keep it honest and simple.
- Subtract to find your net worth.
- Mark each item with ➕ (brings money in), ➖ (takes money out) or 0 (neither).
- Choose one ➖ item to reduce, or one ➕ item to grow, this month.
FAQ
Is a house an asset or a liability?
In accounting it is an asset because it has value. In cash flow terms your own home takes money out each month. A home you rent out can bring money in. Both views help you think clearly.
Can net worth be negative?
Yes. If you owe more than you own, for example with a student loan, your net worth is negative. That is common early in life and can change over time.
Is a phone an asset?
It has some value, but it falls quickly and does not bring in money. Treat it as a tool, not an investment.
What is the quickest way to improve my balance sheet?
Pay off high-interest debt and avoid new debt for things that lose value. Then save and invest a fixed amount each month.
Keep learning
- Practise it: open the interactive Make Money lessons in your learning journey.
- Previous lesson: The cash flow quadrant.
- Next lesson: The cash flow game.
- Related: Avoiding debt traps and make money work for you.
This article is educational and is not financial advice. Kofi is a character from Mondosol’s story cast. Example numbers are made up to show how the idea works.
