Knowing the difference between an asset and a liability is necessary to ensure you’re making strong investment decisions.

Quite simply, an asset is something that makes you money, while a liability costs you money.

Clearly, then, it’s more likely you’ll become wealthy if you mostly invest in assets.

Assets include businesses, stocks, bonds, mutual funds, income-generating real estate, IOU notes, royalties from intellectual property, and anything else with value that produces income, appreciates over time, and can be sold readily.

When you invest in assets, your dollars become employees working to create income for you. The more “employees” you commit, the better. The goal is to get your income as high above your expenses as possible, and then to reinvest the excess income into your assets, employing even more dollars to work for you.

Unfortunately, many investors continually mistake certain liabilities for assets.

For example, a house is often considered an asset, but it’s actually one of the biggest liabilities you can have. Buying a house often means working your entire life to pay off a 30-year mortgage and property taxes.

This works against you in two ways: First, you’re guaranteed to have a massive expense taken away from your income every month (a tell-tale sign of a liability) for the next 360 months. Second, those 360 payments could have been invested in potentially more lucrative assets, like stocks or real estate you rent to tenants.

Ensuring that you know the difference between an asset and a liability means you’ll be able to soundly judge what to invest your money in and what to avoid.

Only invest in assets, which put money in your pocket; and avoid liabilities, which take money out.