TIP: Expenses vs. Assets

A good tip I’ve learned is to try and pay for Expenses with cash while paying for Assets using credit.

An asset is something that continues to have value in the future or alternatively, delivers ongoing value. For instance, a washing machine would be classified as an asset because you will still be deriving value from it in a year’s time (hopefully).

Conversely, expenses are services or consumables that have a finite timeline of value. Examples of expenses are movie tickets or dinner.

The reason for this behavior is that we don’t want to continue to pay for something in the future (through interest expense) if we are no longer deriving value for it in the future.

Where it gets murky. Servicing an asset. For instance, maintenance repairs on an air conditioning unit. A golden rule to live by is if you pay off your credit card balances in full every month; charge it… otherwise use cash.

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