A man builds a fine house;
and now he has a master,and a task for life;
he is to furnish, watch, show it,
and keep it in repair;
the rest of his days.
Ralph Waldo Emerson 1870
Question: Think, is a house an asset or a liability?
Answer: Both. Liability because, as with the above quotation of Emerson, if you buy a house or build one, the house become your master as now you have just gained a “master” for yourself, you have created a task for life. You have to furnish, clean, repair, maintain and keep it in liveable condition for the rest of your life.
It will only become an asset if you purchase this house at a good price to sell it when the price appreciate and meanwhile it is rentable to earn you money, earn you more than what you can get if you put your cash in the bank.
Let us now try to understand the difference between an asset and a liability.
- Real Estate
- Mutual Funds
- Bonds & Notes
- Rentable properties
- Credit cards
- Loans (all kinds)
- Property for own dwelling
- Car for own use
A generic rule is all assets can earn you money while liabilities are those that cost you money.
The poor spent their total income on day-to-day expenses, sometimes the income is not even enough to cover living expenses; while the middle class purchase liabilities that were mistaken for assets like a home, one or two cars and luxury items like big screen televisions etc. Only the rich accumulate income-generating assets on an ongoing basis.
The poor will always be struggling to avoid hunger and should the breadwinner fall ill, most will end up depending on charity.
The middle class will continually be on the race spending only on the sole income which is the monthly salary. As salary increase, so do the taxes and inflation which probably increase faster than the salary. Therefore the middle class will constantly in a financial struggle. They usually ended up paying mortgages of their home and car, treating these to be their assets.
Meanwhile, the rich will get richer as they are on the continuous lookout to acquire more money earning assets and investments. Their expenses will remain constant while their income-generating assets increase earnings for them.
Why is our home a liability? It is because you spend your earned wages for the following:-
- The middle class work all their lives to pay off the mortgage of a home, usually a 25-year loan, assuming you start at 30years old, you will only pay off you loan at 55, just as you were about to retire.
- You need to put aside a portion of your monthly earnings for maintenance and utilities.
- Even if your home value appreciate, you are unable to dispose of as this is your only dwelling.
- Annual yearly taxes like assessment tax, quit rent etc.
Start planning when you are still young. I would encourage all Generation X and Y kids to learn about assets and liabilities and understand the difference. If you are still young and have just started to earn a salary, you would probably still be living with your parents, therefore you do not need to purchase a home yet. You should just do the following:-
1. Understand what is the difference between a liability and an asset
2. Concentrate on purchasing income-generating assets
3. Keep your liabilities and utilities expenses to the minimum
Focus your energy on building your assets to retire young………