Do you consider your house or car to be an asset? What’s the real difference between assets and liabilities? Keep reading and learn how to differentiate assets from liabilities.
Assets are items that you or your company owns and that puts money in your pocket. Liabilities are what you or your company owes to someone else, (suppliers, banks, employees salary, etc.). Based on this definition, you can then analyze each item you have and decide whether it’s an asset or liability.
Back to the initial question. Is your house or car an asset or liability? Are these items putting money in your pocket or taking money out of your pocket? Are these items appreciating in value or depreciating in value over time? Will you ever get a return on my investment? Will you ever make money with these items?
I always thought I knew what an asset was. Until I read the book Rich Dad Poor Dad from Robert Kiyosaki. I do recommend this book, it’s enlightening.
In his book, Robert Kiyosaki discusses and explains the main difference between assets and liabilities, and he gives concrete examples.
I must confess that the first time I heard him saying that a house is not an asset, I got shocked and inside of me I started thinking “What’s this guy talking about? That’s not what I learned in school or from the so-called financial experts I met!” But at the same time, I got intrigued and wanted to hear more and learn more.
I was following the experts blindly, so I’ve never taken the time to really analyze and understand the difference between assets and liabilities. That’s why I strongly believe that we should not be a follower, we should be a student. Followers just follow while real students learn by developing independent and critical thinking and by researching more about each subject they learn. I’m constantly training myself to be independent and to always test and analyze things before turning them into a belief. Our beliefs are what make us do the things we do.
So, is your house an asset? Let’s analyze together and get to a conclusion by answering a couple of questions:
– Is my house currently putting money in my pocket?
– Is my house currently taking money out my pocket?
– Will I ever make money with my house?
Answering these simple questions should give us enough data to come to a conclusion on whether your house is an asset or liability.
Is my house currently putting money in my pocket?
Unless you are renting your house, then the answer is no. Your house is not putting money in your pocket.
Even if you rent your house, it only becomes an asset if what you are receiving from the rental is more than what you spend to pay the mortgage, bills and maintain the house.
Is my house currently taking money out of my pocket?
So, you bought a house for $300,000 (three hundred thousand dollars) by taking on a mortgage from your bank. Let’s say your monthly mortgage payment is $2,000. That’s $2,000 already going out of your pocket.
You also have to pay property tax which is also taking money out of your pocket.
Additionally, you have to pay your utility bills (electricity, water, etc.), repairs and maintenance, and the list goes on. In the end, your house is probably taking at least $4,000 out of your pocket every single month.
So yes, in this scenario, your house is definitely taking money out of your pocket and it’s a liability.
Will I ever make money with my house?
You may argue that your house is an asset because you can sell it anytime and get your money back plus some profit. True, but are you going to sell it? If yes, and you profit from the sale, your house becomes an asset. However, if you are not planning to sell your house ever, then your house will always be a liability.
You might be asking: “What is this dude taking about? Am I supposed to not have a house now? Where am I supposed to live?”. Believe me, I asked those questions as well.
Of course, you should have a place to live. But we are not talking about whether you should have a house. What we are discussing here is whether your house is an asset or liability.
And now you are probably thinking: “Ok, I get it dude! My house is a liability. Now what? What am I supposed to do?
Now that you are aware that your house is a liability (taking money out of your pocket), you will be more motivated to find ways to compensate for that liability.
You can always rent the house or part of it, sell storage spaces, run a business from your home, rent your driveway space, host events in your house, etc.
There are multiple ways you can earn extra income from your house. We will be working on a new article to talk about ways to make money with your house in more detail. Make sure you subscribe to our newsletter so we can notify you about new articles.
Ok, enough with the house. What about your car? Is it an asset or liability?
By now you already know the answer, but we will still talk about it. I mean, why not?
As with the house, you may think that you can always sell your car and get some money. However, cars depreciate very quickly so there is a very small chance of you getting more than what you initially invested on your car. Unless you are a car dealer of course.
Saying that your car depreciates means that your car will lose value over time.
Let’s say, for instance, that you bought a brand-new car for $30,000 and sold it after 2 years for $20,000. That means your car lost about 33% of its original value. In this case, the average depreciation of your car was around %16.65 per year.
And of course, your car was a complete liability because it took money out of your pocket and only returned a small portion of it.
Remember, you also paid for gas, maintenance, repairs, etc. The money your car took out of your pocket is much more than you can imagine.
I trust you have enjoyed this article and that you have gained more knowledge about assets and liabilities. And more importantly, that you will act on it and reduce your financial liabilities.
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