Today we introduce another habit from our book Money Habits for Success: 33 Actions to Succeed and Prosper . . . in any Economy.
The words “Assets” and “Liabilities” are among the most misunderstood and misused in our society. It is not uncommon, for example, for your vehicle or your furniture to be called assets. When I had a “SPOT tracker” on my boat, it claimed to track the course of my “asset.” This is a misuse of the concept.
Assets and liabilities are opposites. Assets build your wealth; liabilities take away your wealth, or, to put it into popular lingo: “Assets put money into your pocket, liabilities take money out of your pocket.”
Does your vehicle build your wealth? No. A vehicle is costly, starting with its purchase price, its insurance costs, the fuel you use to drive it, the repairs you need along the way, and finally, the price you pay for the wrecker to take it to its final resting place. I don’t need to describe similar scenarios for furniture, RVs, back-yard sheds and sporting and recreational equipment.
These are liabilities; they are not assets.
However, there are exceptions to this general rule. If you purchase a vehicle to drive for Uber, for example, providing you with your means of income, that vehicle may be an asset for you. But this is not guaranteed, either.
Let’s dissect this example: If you purchase a vehicle that, over the life that you own it, costs you an average of $8000 per year (taking into account all costs) and provides you with an income for the year of $40,000, you might conclude that the vehicle put money into your pocket, to the tune of $32,000, and therefore is an asset.
Not so quick! Perhaps you could have leased that vehicle for $7000 and made the same $40,000. At the end of the year you take stock, and are forced to conclude that the vehicle was a liability; it did not put money in your pocket but actually took an extra $1000 out of your pocket. It was a liability.
And so it is with many products. If you are in the trucking business, and you calculate that you can make more money owning your own truck than acting as the driver of your company’s truck, then it may be an asset. This goes for many “tools of the trade” for the whole range of professions. If an upgraded tool allows you to double your output—and hence, revenue,–compared with an outdated tool, it may be considered an asset.
House-boating is popular on the Shuswap and many people own houseboats for their own pleasure. But houseboats are incredibly expensive both to purchase and to maintain. They are a huge liability that should only be taken on by those with mountains of discretionary funds to spare.
But, this fact also makes a short-term houseboat rental an attractive, if expensive, summer vacation. Until this year, I owned a houseboat on the Shuswap, almost strictly as a rental (not that I didn’t enjoy it occasionally, myself). When it was heavily booked for the summer season, it put money into my pocket. For me, and others like me, the houseboat was an asset; for most others, though, it is a liability.
What about your home?
It has often been said that your home is your largest asset. But many current financial educators are declaring, emphatically: “Your home is not an asset!” Who’s right?
The answer is: It depends!
Follow the same reasoning as above. When you buy a home it costs you an enormous amount of money, and over the lifespan of the mortgage, you pay a lot in interest besides the home maintenance costs. In short, it takes money out of your pocket every month. That should classify it as a liability.
But it isn’t quite that straight-forward. Unlike almost every other product, real estate tends to appreciate over time. If the value of that property grows faster than the amount you pay on it every year (taking into account all costs—taxes, insurance, maintenance, yard-care, etc., not just your mortgage payment), then that property may have gained adequate equity to actually put you further ahead financially.
But perceived market value that is not cashed out does not make it an asset. If you cash it out at that point, you might be able to call it an asset. But that will only be ascertained in hindsight. If you reinvest that money into another property whose market value has increased equivalently, then you are just moving your money sideways, and your home has not served as an asset.
However, your home can become your biggest asset if you use its equity to put money into your bank account, i.e., if you reinvest the equity in your home into other income producing properties. (For more information on this topic, please read my book Why Own when you can Rent? Eight reasons why OWNING trumps r.e.n.t.i.n.g., or Chapter 33, “Don’t Waste Your Equity” in the book Money Habits . . .
Current financial educators, in my opinion, should be adding one word to their declaration. They should be saying “Your home is not necessarily an asset.”
So, there are many things that are always liabilities, a few things that are always assets, and some things that can be either, depending on their impact to you.
The main things that can be called assets include real estate, equipment and tools of the trade that bring you an income, precious metals (gold, silver), dividend-bearing equities, bonds and GICS (though these are very poor ones), profitable businesses, and pension plans.
If you want to prosper, acquire assets, not liabilities!