Asset or Liability?
What’s your greatest asset? If you’re a home owner, it might surprise you that the answer is probably not your house. In this episode we’ll talk about why that is, as well as what an asset truly is and what your life aim should be if you want to thrive financially.
So what is an asset and what is a liability? In his book “Rich Dad, Poor Dad”, Robert Kiyosaki defines them this way: An asset is anything that makes you money — a liability is something that loses you money. So let’s look at some examples.
How about a diamond ring? Diamonds are forever, right? We’re told that things like that are a good investment. Well it turns out this is just clever marketing, and diamond jewellery loses between 40 and 80% of its value over time — ouch! I guess there’s not much of a market for second hand engagement rings.
What about your car? Now some people would say that an asset is anything with monetary value that you own, so if you own a car then they would say that’s an asset. But when we think about Kiyosaki’s definition, a car is far from being an asset. Cars are expensive — you need to tax them, insure them, service them, MoT them, repair them, put fuel in them, and they’re always losing value. Cars take a lot of your money, so thinking of them as an asset isn’t helpful. They are in fact a liability.
But what if you use your car to get to work to make money? Well it’s still a liability, because it’s still costing you money. If you were able to cycle to work, use public transport, or work remotely and sell you car, you’d be earning the same but be able to reduce your liabilities.
And this is how we want to be thinking in order to create wealth in our lives. Our constant question should be ‘how can I reduce my liabilities and increase my assets?’.
Let’s look at another example — the house you live in. And let’s say the house is mortgaged. Having somewhere to live must be an asset right? No, actually this is another liability. It’s likely that your mortgage payment is the single biggest monthly outgoing you have, so that’s a big liability. It might work out cheaper than renting, so it might be a good option, but it’s still a liability. Obviously having a paid off mortgage reduces this greatly, but there are still many costs associated with owning a house, such as maintenance, repairs, and insurance that cost you money.
But what about appreciation? Don’t houses increase in value? Well that’s true if you buy at the right time and sell at the right time, but when it’s the house that you live in, there are likely to be other factors involved in the decisions of when you buy and when you sell. Depending on what the housing market it doing, you could well lose money.
Thinking of the house that you live in as your primary investment can lead to buying a bigger, more expensive house than you really need. This will significantly increase your outgoings, meaning that you have less money available to put into true assets — that is investments that will make you money on a regular basis.
So how about a house with a mortgage that’s a rental property? Well, as long as the house has tenants that are paying you more money than it costs you to pay the mortgage, insurance, and any other upkeep then it is generating you money and so is an asset. Of course if the house is empty for any length of time or the maintenance costs exceed the income for any other reason, then that house becomes a liability, so you have to be careful. Kiyosaki’s advice is to take on debt to be able to maximise your assets, but I don’t think he talks enough about the risks involved in doing that. Yes we want to maximise our assets, but we also want to minimise the risks and be able to survive any rough times that might come. As with any investment, be sure to do your research, and weigh up the risks agains the potential gains. And, of course, it’s always a good idea to speak to a professional advisor.
Some other examples of assets to think about would be a business, dividend earning stocks or bonds, anything that pays royalties, or any other passive income streams. If it produces more money than it costs you, then it’s an asset. Let’s say you have an online blog with adverts and referral links — if the money coming from those adds up to more than your hosting fees, then that’s an asset. Or say you have shares in a company that pays dividends — if they have a good quarter, they pay their shareholders a share of the profits, called a dividend, which means you get money, so your shares are an asset. Or say you write a book and get paid royalties for the sale of each book — as long as that book is selling, then it’s an asset. There are lots of different ways to build assets into your life.
In interesting exercise is to look at where your money goes each month and think about how much is going towards buying more assets, and how much is going towards liabilities. And ask yourself “what can I do to decrease my liabilities and increase my assets?”
I hope that’s been helpful. If you have any comments or questions, you can let me know by emailing firstname.lastname@example.org. Take care.