According to InvestorWords.com an asset is:
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
Examples that they give include:
Cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.
Now, here’s a definition that I like even better …
… it’s Robert Kiyosaki’s definition of an asset from Rich Dad, Poor Dad:
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My Poor Dad Says | My Rich Dad Says | |
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| “My house is an asset.” | “My house is a liability.” | |
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| Rich dad says, “If you stop working today, an asset puts money in your pocket and a liability takes money from your pocket. Too often people call liabilities assets. It’s important to know the difference between the two. | ||||
I don’t always agree with Robert Kiyosaki, but to me, this nugget is one of the best pieces of financial wisdom ever written (and, I have HIGH standards). Why?
Because, I have seen TOO MANY people base their ENTIRE financial strategy on the VALUE OF THEIR OWN home …
But, your own home is ONLY A PLACE TO LIVE!
It’s only BECOMES an asset when you either (a) sell or (b) put the equity to work for you … until then, it’s just a piece of paper (title deed).Let me share a true story from my own family:
In the 60’s my Grandparents bought a 2-story downtown property with some friends … over the course of 40 years it became old, underdeveloped compared to the multi-story buildings that had sprung up all around, and simply didn’t bring enough rent in to allow her (and her partners) to keep up with costs (personal, and property-related taxes, maintenance, and holding costs).But, they tightly held onto the building because it was an ‘asset’ …
My Grandmother is still alive (she is now 95) and last year I had to LEND HER $40,000 (really! And, she wouldn’t let me just give it to her! Amazing woman …) because she couldn’t afford her share of the real-estate taxes.
Just before Xmas last year, she gave my son a check for his birthday … it bounced!
Happy ending, though …
She (yes last year at the age of 94, and on her own because her partners all live overseas) finally negotiated the sale of this building for $18 million (!) to a developer who way overpaid because he is putting up high-rise luxury apartments.
NOW it’s an ASSET. What about your home?
Good Post! I agree that Robert Kiyosaki has it right but everyone should maintain the home as a liability in order to benefit from compounding interest. Not to mention all those people who had all their money tied up in their home are now paying the price with this declining housing market versus those who kept some of the money in the bank if not all of that money in the bank. Long and short a good happy medium between liability and asset will go further in the long run.
Thanks for your comments (Brent also left one on the About page)!
Robert Kiyosaki does indeed have it right on THIS ONE; we’ll talk more about what he does/doesn’t get right in future posts …
In the meantime, if you own your own home, Brent, or plan on buying one, then be sure to keep the 20% Rule in mind. Good Luck!
I totally agree with you. I also know too many people who consider their primary home as an investment and have recently been burned in the housing/mortgage crisis.
Tim
Thanks for your comment, Tim. It is NOT an asset IF you don’t put it to work …
hi,
Your mortgage will probably be my biggest financial commitment and with something as important as that, I agree that expert advice is
essential.After all it’s the only way to make sure I can made exactly the right decision
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ITS DEPRESSING CAUSE ILL MAKE 1.5 MILLION $
IN 30 YEAR (BEST SENARIO CASE)!!!!!!
@ Schem – Most people would be excited … I guess I’m doing my job 😉
PS Now, I hope you’ll be motivated and step up to DO something about it? Keep us posted on your progress … AJC.
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This is my thought on the matter….A house is a liabilty if you are living in it and have to pay the mortgage…so if you lose your job, who would pay the bill? Definitely a Liability…BUT, if you rent the place out and have someone else paying/covering you mortgage payment, and you lose your job…to me this is an asset because you are still making/paying money on your property….am I right? This makes total sense to me!
Suzanne
@ Suzanne – Makes perfect sense to me, too 🙂
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We increase our assets by putting our money in savings accounts,or mutual funds. Rental property is another popular asset in which to invest, but it’s only an asset if the monthly income from rents, plus any tax advantages, is more than the monthly outlay for the property.
@ Oahu – thus putting money IN your pocket. Nice … and, thanks!
I think that the traditional accounting method of determining one’s net worth still requires you to count the home as an assest and the mortgage as a liability, while hopefully realizing some equity on your personal balance sheet.
What’s most useful about Kiyosaki’s viewpoint though is forcing yourself to change your perspective and not think of the home as such. This forces you to begin thinking about creating other assets to generate income.
If we were all sold out on this idea then we would rent a dwelling while owning rental properties on the side. We don’t do that because the benefits of home ownership are worth the “liability.”