Most people think their house is an asset. I disagree. One of the reasons that most people are struggling these days is because they’re identifying their liabilities as assets. They’ve been programmed by traditional financial and investment companies to think they’re richer than they are and to over-invest in their own personal liabilities (most would call them “personal assets”).
Why is that? Why would the banks and the government do this? It’s simple, in order for them to make money they need to charge you interest, the more liabilities that you have, the higher their income!
So what’s my definition of an asset versus a liability then? It’s quite simple actually… an asset puts money into your pocket and a liability takes money out of it. Even if your house is paid off, it still remains a liability – you still have insurance, property taxes, maintenance, etc. Based on my definition, even when investing in real estate, an asset can quickly become a liability when the property becomes vacant or is not collecting rent.
Now I’d like to make this clear, I’m not advising anyone not to buy the home that they live in, but rather I’m asking you to be clear that it is in fact a liability. By doing so, it makes it a lot easier to think clearly about how much you’re willing to spend on purchasing it, renovating it and always having the latest modeled kitchen or bathroom, etc. By realizing that these are all expenses, and that it is in fact keeping you further away from the goal of financial freedom, you are more likely to be more modest and more responsible with your divestment decisions (again most people would call this an investment decision).
Granted, most people don’t like to be told the truth, because it hurts. Most people will try to discredit what I’m saying with a dozen or more rebuttals… all I can say is that the truth hurts.
Here’s the most frequent rebuttal that I receive “But my house is going up in value by investing in it”
My response is always similar “While this is true, you will rarely get your entire divestment back. Furthermore, even if you were to get every penny of your divestment back, that’s a zero percent return on investment. That’s worse than GICs and a zero percent return cannot be considered an investment.”
What about cars? The more expensive it is, the bigger of a liability it is and the more assets you require to cover its expense. Cottages? Liability. Boats? Liability. Pets? Liability. I think you get the point… does it mean you shouldn’t own some of these things? Absolutely not! But be smart with your decisions and if you’re actively increasing your liabilities, I urge you to ensure that you increase your assets at a significantly quicker pace. I can hear you now “But this means I cannot have my liabilities (fancy cars) until I invest in enough assets (real estate, stocks, etc.)”. Bingo, now you understand.
Quick, simple and effective. If you want financial freedom, you need to invest your hard earned dollars into assets, not liabilities. Pop quiz – which one is which again?
Founding Partner, Amplified Investments