How to Explain Assets and Liabilities To Your Child
Gadgets and Gizmos a-Plenty
Updated April 4, 2023
An Overview of Assets and Liabilities
If your kids are like our kids, they've got gadgets and gizmos a-plenty. Do they know their thingamabobs are actually assets? And conversely, that the things they borrow are liabilities? While assets and liabilities are opposite sides of the same coin, mastering these simple concepts is essential to building a financial foundation. To create long-term wealth, kids need to understand the importance of maximizing what they own and minimizing what they owe.
How to Explain Assets and Liabilities to Your Child
What is an asset?
In kid-speak, we say an asset is something we own of value. “Your assets might be your lego collection, binder full of baseball cards or even your bicycle. Assets are things that hold value and could help you in the future if you sold them.” Parents’ assets might include cash, investments or real estate.
What is a liability?
A liability is something we might owe to someone that has not yet been given (or paid!) back. “If you borrowed a soccer ball from your neighbor, it would be a liability until you’ve returned it. In grown-up life, liabilities are usually borrowed money that has not been paid back.” These liabilities usually include a mortgage, student loans or credit card debt.
It’s important to note to kids that not all assets are created equal. Some depreciate (decrease in value) over time, while others appreciate (increase in value). For example, a house might become a more valuable asset over time, but a car loses value the moment you drive away from the dealership.
Individuals can determine their net worth (or current financial situation) using a simple equation:
Assets - Liabilities = Net Worth
Benji’s Bottom Line
To build long-term wealth, kids must learn to protect and grow their assets, all while lessening their liabilities. If they can master this equation, they will know their worth, no matter what path they choose to take.