Stop calling your house an 'asset'. Your house is a LIABILITY
- Mar 1, 2018
- 2 min read
I don’t get why they don’t teach this shit in school.
There are four (4) core areas on a financial statement:
Income;
Expenses;
Assets; and
Liabilities.
They can be drawn on a diagram like so:
Let’s define these four terms:
Income: Money that enters your bank account in a given month (or day, year, etc.)
Examples:
Money you get paid for working
Money you get from your tenants
Money you take out of a vending machine you own
Expenses: Money that leaves your bank account in a given month
Examples:
Money you spend on rent, food, and utilities
Money you spend on useless stuff
Money you spend buying candy bars for your vending machine
Assets: An item, process, or system that puts money into your bank account on a monthly basis without you having to be there to do so
Examples:
Apartment buildings
Stocks that pay dividends (no I’m not talking about price appreciation or capital gains)
Websites that pay you to own them
Vending machines
Liabilities: An item, process, or system that takes money out of your bank account on a monthly basis
Examples:
Your mortgage
Your utility bill
Your car loan
Your mortgage payment on an apartment building you bought
Your yearly franchise fee for the McDonalds you won
Assets put money into your bank account (or income section)
Liabilities take money out of your bank account
Make sense? Do you understand how to read a financial statement? If so, you just became smarter than 90% of the people who work in banks and other “financial planning institutions”.
So now, where does your house fit in.
It does fit in the income nor expense rows because it’s not money.
Is it an asset? Well, does it put money into your bank account. No, it does not, unless you’re charging people to live in it.
Is it a liability? Well, there’s lots of liabilities associated with your house, such as utility contracts and property taxes.
Unless you're charging people to live in your house, and amount you charge per month is more than the liabilities associated with your house,
Your House Is NOT An Asset
Your House Is A LIABILITY!
“But it goes up in value!”
This is what broke people use as justification for putting most of their money into a house. The problem with this is the “market value” of your house is nothing more than someone else’s opinion. You can’t use the perceived increase in value of your property for anything unless you want to either sell the house (no longer your “asset”) or you take out a loan against it for the amount of the increase in value (where do loans fit on a financial statement?)
Please stop trying to pour all of your money into your house thinking it's a 'good' investment. Unless you're charging other people to live there, your house is hurting your finances!
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