If you want to build a strong financial future for yourself, you need to learn how to manage your assets and expenses.
It might seem like only assets can benefit you, but what if you could actually turn your expenses into assets?
Today, we embark on a journey with you to discover the distinction between an asset vs expense, which will make your life easier. Join us!
Asset vs Expense – Definitions
For a better understanding of your financial health, we need to demystify these two terms.
What Are Assets?
Assets put money in your pocket. We consider our assets to be:
- Your resources that have worth after a year or some period;
- Reported in your financial statements, which consist of the balance sheet, income statement, and cash flow statement;
- Subjected to depreciation over its useful life;
- Resources that can bring you future economic benefit or profitability, as well an increasing value.
What Are Expenses?
Expenses don’t produce cash flow.
We define expenses as:
- The daily, weekly, monthly and other expenses you have in your everyday life;
- The funds you need to generate cash flow;
- Resources that are spent due to short life span and can’t increase in value;
- A type of expenditure that flows through income statements to arrive at net income.
Are Assets and Expenses Yin & Yang?
To fully understand these terms, we will provide you with some examples.
An asset is usually tangible: a car, real estate, cash, machinery, etc. Or an intangible asset like intellectual property, patents, trademarks, copyrights, or goodwill. You can also acquire and upgrade any fixed asset (ex., property, technology, equipment) through capital expenditures.
Meanwhile, expenses are things like your bills, utilities, car payment, and mortgage. All of these expenses that we just accept as they are as something that we need to pay and say goodbye to that money forever.
Expenses are usually less expensive than an entire asset, but they are always present and add up in the end. You might think that you’re only spending $200 on utilities every month, but that’s actually $2,400 per year.
Imagine if you could pay your bills and make money off of them.
We can state unequivocally that assets and expenses are not yin and yang. Even though they cannot exist without each other, one brings you profit and the other does not. Nonetheless, they can complement each other. But assets are where your focus should be.
The Intertwining of Assets and Expenses
Assets and expenses always exist together in our financial lives, but they have different roles.
Simply put, assets are things you acquire to produce cash flow. To be successful, you should focus on the future and learn from the past, meaning that you should know and analyze your previous activities by managing expenses. But by managing assets, you update and improve, which is far more critical. All successful people understand what assets are. And they use them well.
But is just managing your assets and expenses as two separate things really the best thing you should do for your financial future?
The truth is, you can turn any expense into an asset if you just have the right money mindset.
First, let’s see how assets and expenses are viewed in accounting.
How Accounting for Assets Works
An asset needs to be recognized on the balance sheet by meeting recognition criteria. The general criteria are probability and reliability. When it’s highly probable that future economic benefits will flow into a business or have a reliably measured cost or value, an asset can be submitted to the balance sheet.
We account for assets by doing a process of depreciation, which shows the asset’s cost throughout its useful life and shows it’s losing value over time due to that process of devaluation.
Guide to Accounting for Expenses
The same accounting standards apply to expenses. Starting from probability: a decrease in future economic benefits due to the decline in an asset or an increase in liability that can be reliably measured has been noticed, making an expense recognized. It means that expense recognition occurs simultaneously with the decrease in assets.
We record expenses on the debit side of the income statement, where we measure losses. Depending on which accounting method (accounting for cash or accruals) you use, expenses need to be recorded in the profit and loss report (or previously, the income statement) for a specific accounting period.
No matter if you’re running a business or just doing this for your personal finances, make sure to keep an eye out for your income statement and how it fluctuates throughout the year if you want to improve your financial health.
If you want to learn even more about accounting for assets and expenses, you can check these video guides we prepared.
Tips for Handling Assets and Expenses
We have extra tips for you that can help you manage your assets and expenses. Here’s what you can try.
Invest in Items That Impatient People Don’t
It means that the good assets will keep you waiting a bit. Easy money quickly goes away.
For example, if you buy a seemingly bad property in an attractive area, eventually someone will want to start building, and your parcel will increase in value. If you negotiate well, the cost of goods sold is minimal in that case.
Revise Your Personal Expenses
Analyzing and watching out for how you spend your money on a regular basis is a must if you want to get on the road to financial freedom.
Plan your expenses accordingly. Know how much it costs for you to live the lifestyle you live right now, and the lifestyle you want to live. Be intentional and deliberate in how you spend money and what you spend it on.
Find substitutes for every cost if possible. Maybe you don’t need a new Armani suit this month, so replace it with second-hand shopping.
Be Careful With the Credit Cards Never Ending Cycle
Many people fall into this trap of having multiple credit cards and being stuck paying them off. But if you are already riddled with mismanagement of credit cards in your business or personal life, just remember to pay them off regularly every month. Create a budget and hold yourself accountable.
Assets That Will Make You Rich
In our experience of managing finances and understanding how to capitalize on assets, we highlighted the four most essential assets that can help you win and become rich.
- Start building a business or invest in some.
- We live in a time when you have maximum protection and low overhead due to digital marketing and the benefit of more tax write-offs while creating a business. Tax write-offs help you reduce your real-life income and put you in a better financial position. As long as you can invest in or start a company that is a cash-flowing asset to you, absolutely do it! Start implementing your ideas in the form of business.
- Managing loans.
- Put yourself in a position to catalyze your own source of financing by becoming your own bank. What do the banks do? Lend money. Utilize loans and become your own banker. By providing loans to other people or ourselves, you can benefit from the cash flow that comes with charging interest.
- If you would like to start becoming your banker, we suggest this article for diving into the topic. Also, Wealth Nation prepared a learning program for you to become your own banker in just eight weeks.
- Remember — fear leads to nowhere, education leads to success. Don’t be afraid of managing loans. Loans are assets.
- Real estate.
- Within real estate, you can take advantage of taxes, get your cash flowing and replace the bank. Give yourself time to do your research and learn about real estate because you will need to understand how the real estate environment works.
- Life insurances.
- Paying your life insurances in dividends can transfer wealth into your life. You accumulate cash and invest further. Life insurances allow you to produce cash flow while you are still alive and use it in loans. You can utilize those loans to capitalize on other investment opportunities. There is an eight-week course to learn about this at Wealth Nation. We can guide you through if you face any difficulties. Believe us. We’ve been there.
How to Turn Your Expenses Into Assets
If you really want to build wealth, you need to acquire assets. And you can even turn your assets into expenses.
If you own a whole life policy with a cash value, you can borrow money from yourself on a quarterly basis to pay for your expenses. And then you can just pay yourself back with interest.
This way, you’re building up your own money and creating cash flow.
This is called Lifestyle Banking.
Here’s an example that can help us illustrate it.
Let’s say you need to pay $400 in utilities every month. Why would you just pay those bills and say goodbye to that money forever, when you can turn it into an asset?
Take out a loan of $1,200 from yourself to cover your bills on a quarterly basis, and then just pay yourself back with interest. This will put more money into the cash value of your policy, which will continue to grow by itself anyway.
In the end, you’ll end up both paying your bills and investing in the future. You don’t need to choose between one or the other!