Assets = Liabilities + Equity.
That’s all there is to accounting.
Your assets represent the things you have that have value…your house, your possessions, your education. Your liabilities represent the money you owe for those assets. Your equity represents the difference.
If you pay for a new car, that’s an asset. But you still owe the bank money for the car. That’s the liability. As the value of your car decreases, it may go down faster than the amount you still owe. If you have assets that are worth more than your total liabilities, you have positive equity, which is good. If you owe more than the value of your assets, you have negative equity, which is bad.
“Bad” assets are things that don’t make you money and lose their value, like expensive cars, clothes, vacations, entertainment, and dinners. “Good” assets are things that do make you money and increase in value, like a higher education, investments, and (sometimes) real estate.
That doesn’t mean that you should never go to the movies or that you shouldn’t buy a car. It does mean that you should be careful to spend your money–to increase your liabilities–on things that can make you more money than what it cost you to buy them.
If your equity is high, that means you’ve got a lot of value and you don’t owe much money on it. And that’s how you get rich.
Easy, huh?