Understanding Assets and Liabilities | Cash Course | PragerU Kids

[Music] all right listen up team we are getting run around out there everyone's balance sheets are all over the place your assets and your liabilities are out of position and money is slipping away unchecked you got to get your head in the game and get your accounts in orderers what Jackson football no this isn't about football this is about the game of money and if you want to win this game and hit your goals then you better know where your money is gaining and where it's losing what now Johnson are you serious you don't know what those things are well if you don't know the difference between an asset and a liability then you better watch this episode of assets are items with some value like cash a checking or savings account coins and even items like art collectible cards or memorabilia an asset could be something you own have already paid for or someone gave you it's yours to keep sell rent or even give away to someone else and the best assets are the ones that keep putting money in your pocket the money flows in over and over and over again on the other hand liabilities are Financial Obligations you owe someone or a company like a loan from your parents or an outstanding balance on a credit card it could also be a mortgage auto loan or student loan these are Financial Obligations to others regardless of whether or not you still possess the item you borrowed money for like a cross stick purchase on a credit card that broke after one game to keep track of this information people utilize a balance sheet that lists their assets and liabilities and outlines an individual's financial position at a given time hey coach is this sweet artwork that I bought last week an asset absolutely but it could also be a liability wait what well if you own the artwork it's your asset but if you took out a loan to buy it you owe money to the bank and that part becomes your liability as you make loan pay payments you reduce your liability to the bank and increase your ownership of the artwork nice the difference between what you own and what you owe is called Equity it could also become a greater liability if due to changes in market demand or if it gets damaged the artwork depreciates in value below the loan amount this means you owe more than what the item is worth also known as negative equity coach this is definitely going up in value if it does and appreciates that'll benefit you when calculating your financial net worth that's the value of your liabilities subtracted from your assets you got that Johnson exactly if it's a positive number you're in good shape that might mean you have money to spend invest or save if it's a negative number then you owe more than the value of what you have that's called being underwater or in the hole and that's not a great place to be you get that Jackson Cash Flow is an easy way to think of assets and liabilities where assets put money in your pocket and liabilities take it out if if a collector pays you monthly to display your artwork in their Gallery it's an asset that's putting money in your pocket because of the cash flow at the same time if your monthly loan payment is greater than the money coming from The Collector then your artwork is actually taking money out of your pocket making it a liability this idea can be visualized as part of a cash flow statement which also lists your income and expenses a positive cash flow indicates that you can comfortably afford your expenses and have some money left over for other purposes such as saving or investing a negative cash flow indicates that you may need to review your spending habits or Access Credit to get back on track now that you know something about assets and liabilities it's time to take action first consider the things that you currently have is it an asset or is it a liability you might be surprised by what you discover you might realize that what you thought was a liability is actually an asset and vice versa second create a balance sheet and a cash flow statement even if you don't have a lot of of assets and liabilities right now it's never too early to build good financial habits seeing it all in front of you will help you create a plan for all the things you want to do with your money third consider before you purchase is it going to be an asset or a liability will it affect your long-term plans financial goals or immediate cash flow being thoughtful about your purchases will make you a smarter money manager understanding assets and liabilities is a very important part of managing your financial situation the there are good assets and bad liabilities but there are also Bad Assets and good liabilities it's all about how you'll use them and whether they ultimately put money in your pocket or take it away all right now let's get back out there and balance those sheet come on gentlemen you twoo Johnson let's go watch more at Prager kids.com and parents don't forget to subscribe