The main difference between assets and expenses is time. Assets have sustained worth; they last a long time. Expenses get used up quickly and consumed right away (or very shortly). When you borrow money to fund asset purchases, you walk away with something of value that will last longer than the loan.
When you borrow money to fund expenses, you’ll have nothing (of value) to show for it, but you will still have debt. To make borrowing productive (rather than destructive) to your finances, use it to acquire a portfolio of wealth-building assets and avoid using it to cover expenses whenever possible.
What Are Assets?
Assets are anything that is owned by an individual or a company. These can be sold for cash. Assets usually produce income or provide value to their owners. Economic resources are assets in the world of financial accounting.
Physical objects or intangible concepts can be utilized and owned to create value. An asset is regarded as having real value to the owner.
Furthermore, assets must be convertible into cash, which itself is considered an asset. As measured by accountants and accounting processes, there are many types of assets. Assets include current assets, long-term assets, intangible assets, and deferred assets.
What Are Expenses?
Business expenses are costs involved in conducting daily operations, expanding and growing their businesses, and acquiring additional assets, properties, and factories. Several different types of investments are available for companies to invest their cash in. Companies could purchase real estate or a new building.
Their premises could also be equipped with office or computer equipment. In order to improve the productivity of a business, they may update older technology or older machinery. In addition, these companies might also acquire vehicles for their traveling staff, such as executives, salespeople, and delivery personnel.
Difference Between Assets and Expenses
The difference between assets and expenses is in the timing, as assets bring benefit in the near future, and once they are used, they become assets.
When inventory is sold, it is moved out of the inventory account on the balance sheet and into the Cost of Goods Sold account on the balance sheet.
There are times when an asset does not provide benefit because it lost its value prior to its use. As a result, it is deducted from the income statement as an expense. In the income statement, a loss is recorded if the inventory is somehow damaged or is no longer useful.
Borrowing To Buy Assets
The key to successful borrowing is simple: Borrow money to buy assets that will gain value or produce income. The flip side of that is to not borrow money to purchase assets (physical or intangible items of value that last for at least one year) that will lose value.
Of course, there’s no crystal ball to tell you whether a specific asset will definitely gain or lose value, but there are some general rules.
For example, new cars always lose value while real estate gains value over time; of course, not every house will be worth more than someone paid for it, and some classic cars can gain considerable value over time. The trick lies in knowing when an asset is more likely than not to gain or lose.
Houses, Cars, and Physical Assets
When you borrow money to buy an asset, you pay more for it (the only exception is no-interest loans) than its price. When the asset you’ve bought comes with wealth-building potential, it may offset the borrowing costs; that’s an overall win for your net worth.
Here, borrowing as little as possible at the lowest rate and for the shortest time possible offers the biggest benefit to your wealth. Plus, if the asset does end up losing value, the damage will be less.
When you borrow money for an asset that you know will lose value, that chips away at your net worth even more than if you’d paid cash for the asset. The best example of this is cars, which most people borrow to buy.
When you need an asset and have to borrow to get it, the financially sensible thing to do is buy the least expensive version of the asset that you can. For example, you may need a car, but you don’t need a brand-new BMW.
Before you borrow the money, consider the total cost compared to the asset’s value and the opportunity cost: Is a $50,000 car worth more to you than a stress- free retirement (for example)? The answer to that is purely personal—just check in with yourself before you borrow money for an asset that can’t add to your wealth and could leave you in a less-secure financial position.
Investing in Yourself
Education is an asset. A business you’ve built is an asset. When you borrow money to invest in yourself and your future, you’re debt funding an asset, even though it’s not something you can touch. While it makes sense to borrow money for these assets, many people over borrow and end up stuck with debt they can’t reasonably manage.
Before you borrow for education or to start or expand a business, weigh the borrowing costs against the financial benefits. Make sure the education you’re getting gives you the opportunity to earn more money than you could without that degree.
Consider the probability that your future earnings will outpace the money you’ve borrowed. Create realistic plans and projections to make sure that money you borrow to funnel into your business will be transformed into revenues that will more than cover the loan expenses. For the loan to be a good financial move, the benefits must outweigh the costs.
Borrowing To Pay For Expenses
Expenses have no lasting value; they’re consumable items that range from food to electricity to pencils. Borrowing money to pay for expenses is one of the fastest paths to financial insecurity. In fact, the number one rule of wealth building is to never spend more money than you earn.
When you have to borrow money to cover your regular expenses, you’re doing just that: spending more than you earn. On top of that, loans made to cover expenses are generally unsecured (like personal loans), revolving debts (like home equity lines of credit), or both (like credit cards).
These types of loans come with the highest interest rates, even for people with good credit. Over time, the expenses paid with borrowed money may end up costing you two or three times (possibly even more) than if you’d paid cash.
That’s a bigger dent in your net worth for something with no future value. If you need to borrow to cover your basic monthly expenses, break out of that cycle as soon as possible.
With a combination of spending less money and bringing in more money, you can change your financial position. Then you have the choice to borrow money on your own terms when you want to and not because you need to.
College students are increasingly turning to credit cards to cover living expenses, and many are using multiple cards. Only 51 percent plan to pay off their balance in full any given month. And 36 percent of college students rack up more than $1,000 in credit card charges before they graduate (according to a report by EVERFI).