These definitions are practical and do not necessarily correspond to the technical definitions that accounting and finance gives us, these concepts belong to the book by Robert Kiyosaki called: “Poor father, rich father”.
In this book the author explains that poverty or wealth are taught from a father to a son, financial education is the foundation for a healthy financial life, I recommend reading this book.
Learning the fundamental differences between active and passive:
- An asset puts money in our pocket
- A liability is anything that draws money out of our pocket
All people perceive some type of income and we also spend. The assets serve to generate more income, for example, businesses with profits, investments, rental properties, etc.
On the other hand, liabilities will not cause expenses, it is at this point that most of them can be confused, because they have taught us that buying a house, a car, having a credit card, etc. They are active, but this type of asset requires maintenance so it will generate expenses. Any subscription whether it be cable service, internet, telephone, memberships, debts, etc. they are things that will cause us to spend constantly.
Now we understand that having a house and a car is not necessarily bad, they are useful things that will make our life more comfortable, but we have to understand that if we only look for this type of things, then we can never generate other income, that is, instead of focus on buying liabilities, first I will focus my efforts on buying assets, because assets will increase my income, with this flow in favor we can have a better income and over time we can buy what we wanted at first.
Poor and middle class people spend their lives buying liabilities, the worst part is that they buy liabilities thinking they are active. The rich, on the other hand, buy assets that pay their liabilities, their assets are always greater than their liabilities, so they can buy more. Understanding this is fundamental and changes the way you look at finances.