How Productive Liabilities Lead to Greater Assets
Liabilities are often considered as an unwanted term in the realm of financial literacy. Every person wants to increase their assets and reduce their liability as much as possible. No one in this world wants to hold any sort of liability in his life. But still, there are so many productive liabilities due to which assets are being created.
Let’s first uncover the difference between assets and liabilities. In simple terms, assets are those resources that generate some income while liability is something that incurs an expense. As per definition, we recognize our net worth only when we subtract all the liabilities from assets (Net Worth = Assets – Liabilities) and that’s why subconsciously we are so concerned about it. The most crucial thing for your financial success is your capability to convert your net worth into cash-flow.
In reality, it’s impossible to acquire an asset without also incurring some form of liability. For example, Loan is a liability but it is taken by many people to start or expand their business, which is an asset. Such liabilities that always create a corresponding asset are referred to as productive liabilities, which we are going to discuss throughout this article:
The concept of utilization teaches us to stop waiting for abundance to come to us and instead become agile in creating it ourselves. It teaches us to use our greatest assets as they emerge to produce value for ourselves and others. If you are not utilizing your assets just because of the fear of losing them, then probably you are not taking their full advantage. The trouble with unutilized assets is that they can increase our potential losses.
Utilization is also about immediate enjoyment of our life, as well as creating favorable conditions for long-term enjoyment, rather than securing our assets for fear of losing them. Debt is also a liability but if you are financially intelligent and use debt to create cash flow, it can enable you to create assets. Similarly, you can use credit cards to earn cash-back and various rewards on stuff that you have already planned to purchase. All things can be good or bad depending on how you use them.
According to Wikipedia, A cash-flow is a real or virtual movement of money. It is an ongoing stream of income you receive from an investment on a monthly or yearly basis. When we deeply think about prosperity, then cash-flow is the actual indicator of our financial success rather than net worth. A person could have a net worth of $1 million with no income. That’s why cash-flow also depends on your mode of income and its sustainability.
Healthy cash-flows are created by building businesses or investing in tangible assets such as gold and real estate. The more quickly the money is exchanged, the more velocity it has, and consequently the more productivity and profit are created in the economy. Net worth is useless until utilized, just as a person’s potential is worthless until it is realized through creating value for others.
The most crucial aspect for converting your net worth into cash-flow is value creation. But it should be done in such a way that people will pay us on a regular basis for using that value. If you are investing your assets in creating value, then it will further enable you to create more assets that would be greater than previous ones. The only way to bridge the gap between the potential of net worth and the productivity of cash-flow is through creating value.
Money is also simply a representation value. It is never manifested and exchanges until a value is created. So, rather than throwing your all money into various investment and saving accounts, you can utilize it to create value. We must understand how assets are created using liabilities by the mindset of value creation. All material objects are also a reflection of value creation. If we can create more value in the world by carrying any liability, then we shouldn’t hesitate to do so.
See Beyond Numbers
Thinking of prosperity in terms of just monetary aspects can steal both our enjoyment as well as happiness. Numbers can be a useful tool but calculating our prosperity through math is completely illogical. You may have seen many people with lots of assets on their name but still, they are looking to accumulate more. Focusing only on the accumulation of assets can drag you towards unsatisfactory jobs and lifestyles.
We are so inclined towards numbers because we like the concrete feeling that calculation gives us. Numbers can be used to overemphasize and manipulate, but don’t forget that they are just one ingredient of the full equation. Our financial decision can be negatively influenced if we overvalue the numbers. For example, the salary of your employees and the rent of your office is a big liability if we look at numbers, but they are also the major source of your biggest assets.
New Rules of Money
The people who are most worried about liability are those playing by the old set of rules. In the new rules, it is more necessary that you know how to invest your money instead of just earning and saving them. By keeping all the money or more than required money in your saving account, you are limiting your potential and productivity. You need to know how to convert your assets or money into long-lasting value.
Money is a tool to build a better life. If this tool remains unused, what’s the benefit? The problem is that the old financial wisdom, old rules of money are riskier than ever. People who hold strict budgets rarely think about ways to increase the size of their budget. In such a scarcity mindset, nothing is ever enough. The more simultaneous uses we find for each individual asset, the more wealth is created.
When we realize our potential and start working to provide value for others, then we’re not driven by greed and hence productively use our assets. We should think about setting up a system to enjoy life and capture wealth along the way.
As explained above, utilizing assets is one critical way to create value in society. The greatest investors are those who practice the concept of utilization and cash-flow rather than accumulation. The more you know how to manage your cash-flow, the more your capital gain increases.
In reality, it’s almost impossible to ever acquire an asset without also incurring some form of liability. When we begin to understand the intimate relationship between assets and liabilities, we also stop worrying so much about liabilities and instead focus on the corresponding asset that any productive liability brings into our life.