No seriously, what is an asset? In popular media and everyday conversation – assets are seen as objects that one owns. Famously, a person’s home is often considered a ‘asset’… but that’s a misleading line of thought.

A real asset, from a personal finance perspective is something (a house, a business, a service, vehicles etc) that provides you positive cash flow. Let’s break that down: Does your home put money into your pocket? Or does it take money from your pocket?

For the average person, their home is taking money from their pocket in the following ways: having to pay a mortgage, having to pay for maintenance, having to pay for home insurance, having to pay for lawn care or the tools to mow one’s own lawn, the water necessary to fill your pool (if you’re one of the few that has a pool) as well as the chemicals necessary to keep the pool clean… the list goes on. So in this frame, you are paying money out of your own pocket to keep and maintain your home. You get to pay bills for the next 30 years, and maybe the ‘asset’ (home) gains value because of the appreciation of homes in the surrounding area, or improvements you’ve made. But at no point, did the home actually put any money in your pocket, or increase the amount of cash that was in your bank account.

So again we ask ourselves, what is an asset? Is a car an asset? That depends on how we use our cars. In the personal finance frame, the average person’s car is not an asset. Not even a ‘depreciating asset’. While your car may take you to and from your primary means of income (aka a Job), it is not producing any cash on the way to or from the job site. And because the namesake of this blog is Military.cash , I would be doing you a disservice by letting you think your car is an asset (unless you drive a taxi or drive for Uber or Lyft, you win this time).

For most people – your car is the second most expensive thing you own, and it’s the least productive thing you own: it takes money from your pocket in the form of wear and tear, routine maintenance (your friendly reminder to change your oil), car insurance, fuel or charging costs and depreciation. I recognize the value that the vehicle may provide, in making it simpler to navigate roads and getting you to and from work, but the car itself is not an asset.

Now that we’ve started to reframe what is and what is not an asset, we can start to appreciate what a real asset is in this context. I say again – it is a productive thing or concept. It puts money into your bank account and/or pocket. What does that look like materially? Let’s take our previous example: a home (or more importantly, a house). Houses can be assets, if they meet the following requirement: the house that you own produces cash that you can spend elsewhere. A house is an asset if someone else is paying the mortgage and you get some of the excess rental payment. You’re providing a home for someone else as a service, and in exchange they’re paying for the convenience of not owning said home. But it’s important to note, that a house is only an asset if it is producing more money for you than you’re paying towards the mortgage. Cash is flowing to you, not being dumped back into a new backsplash or kitchen renovation. Similarly, a spare car that you’re renting out and making an extra $50 or $100 dollars on at the end of the month on a service like Turo, after all expenses are paid (insurance, fuel, wear and tear), that is an asset. It’s putting money into your pocket because you’re providing the service of renting out your sweet ride, and someone is paying you for that convenience.

Even better, we can look at assets that anyone can get a hold of: Index Funds from a company like Vanguard or Charles Schwab! Buying some shares of ticker symbol VOO (Vanguards S&P500 index fund) or VTI (Vanguards Total Stock Market index fund) will net you money at the end of each quarter of the year in the form of a dividend. You pay a few hundred dollars for a share, and each share will net you a few dollars of cash every three months! No extra work required. Truly passive income, from an asset that you own, that will pay on regular intervals.

But what makes this different than the examples of a house or a car? Didn’t the stock purchase take money out of my pocket? Well, yes, it did take money out of my pocket or bank account. But after the one time purchase, you bought stock in a index fund, that means you own a fraction of the companies that are held in that index fund. And those companies are productive, and will likely remain productive for the duration of our lives (based on the previous 100+ years of economic success in the U.S.) and provide you that steady dividend (cash flow) without any additional work or effort on your part. Cash that can then be spent on living expenses, hobbies, or reinvested into more stock so that your money works for you over the long term.

That’s it for what an asset is. It’s really just anything (or any concept) that puts money in your pocket. Be it a business, be it employees, be it vehicles or apartments or otherwise. Next, I’ll break down what a liability is. The best part is, we already introduced two huge liabilities for the average person (hint: your home and your car are likely a liability). Take care for now, and I’ll see you in a few days!

-Michael, with Military.cash