Flexo over at Consumerism Commentary is getting his knickers in a knot over Robert Kiyosaki’s definition of “asset” and “liability”:
A house, like any other object that comes into your possession, is classified as an asset. An asset is something you own. A house has a value. Whether you assign the value as the price at which you purchased the house or the price at which you believe you can sell the house, that amount is how much your house is worth.
You can offset the value of the asset with the value of the mortgage, your liability. Your house, an asset, subtracted by your remaining mortgage, your liability, results in your wealth due to your house. That’s commonly called your “equity,” but that has a murky definition, too.
So why do so many people claim that your house is a liability if it’s clearly incorrect from a financial standpoint? Most of this stems from one personal finance “guru.” Robert Kiyosaki, a successful marketer of products, believes an asset is anything that provides cash to you, while a liability takes your cash away. These are not the traditional meaning of the words, but this establishes a framework for the ideas Kiyosaki tries to sell. Kioysaki believes you should strive to increase the assets that provide positive cash flow (Kiyosaki-assets) and reduce the assets that require negative cash flow (Kiyosaki-liabilities).
The concept is sound, but Kiyosaki’s use of the words “asset” and “liability” angers those of us who understand finance and prefer not to confuse the general public by redefining words.
First of all, let me put on the record that (a) I like the general thrust of Flexo’s blog, and (b) he is ‘technically’ correct in what he says here, BUT …
… Robert Kiyosaki is simply trying to make a critically important point (in his famous book Rich Dad, Poor Dad) that I covered in my earlier post on this subject:
|My Poor Dad Says||My Rich Dad Says|
|“My house is an asset.”||“My house is a liability.”|
|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 guess that Kiyosaki could solve the problem by saying that “My Poor Dad says that my house is an Asset, but my Rich Dad says that the mortgage is a liability” … but, that doesn’t really present the view that you can have a fully paid off house and still live like a pauper (asset rich … cash poor).
Also, I could point you to the Merriam-Webster Online Dictionary definition of ‘Liability’ (“one that acts as a disadvantage” “drawback”) and state the obvious i.e. Kiyosaki is using the general definition, not the financial definition, but that’s not the point either …
… regardless of definitions, I feel that the ‘issue’ of taking a technical term and ‘bending’ its use in order to make a point that could mean the difference between your future financial success and failure is a relatively small one … as long as you understand that there is a technical definition of the term as well, just in case you do need to converse with professionals (who are all trained to talk in your lingo, if necessary, anyway) 🙂
So, can you live with two definitions – a technical one and a ‘functional’ one?
Kiyosaku and Dave Ramsey both have comparatively infantile psychologies built around meeting immature adults where they are to improve their personal finance habits.
That is not to say that Ramsey’s debt snowball doesn’t work, it just isn’t as efficient/effective from a person who pays their highest-interest loan off soonest and measures their wealth by Net Worth instead of cash on hand.
Some people need to be treated like children because adopting a Net Worth mindset is too complicated for them. If that gets them started on the road to FI, then fine. Eventually, if they stick with the program of learning about finance rather than just doing what Dave Ramsey says, they’ll see how Ramsey was exactly what they needed at the time, and someone they will not follow in the future.
Flexo is an idiot. He’s been on the wrong side of common sense too many times, and I’ve had to stop reading anything written by him.
But on the topic of whether a house is an asset or a liability, I think the whole point of Kiyosaki’s book was that traditional thinking will leave you poor — only a fool does the same thing and expects different results.
Anyone who has a problem with redefining terms has so completely and tragically missed the point of the book.
True. I agree
To the RK point, I believe your home equity is the only asset and of course that can change
@ Randy – If I strike out your first line (I like Flexo’s blog), I agree with the rest of what you said …
BTW: Randy is a photographic artist – not entirely to my taste 🙂 – but, definitely talented and novel.
@ MoneyMonk – I’m not sure that RK’s point was that your home equity is an asset: you see, it doesn’t put money INTO your pocket – unless it (a) appreciates and (b) you sell/downsize – like a rental does, ergo you should find a way to release/use that equity …