Disclaimer: There is nothing wrong with buying your own home… But there is everything wrong with believing that your home is an Asset!
Knowing the difference between an asset and a liability is key to becoming more financially literate.
Not all properties are assets, one of the biggest failures when it comes to financial literacy is that we are told that our homes are asset’s, we are told this mainly by banks and accountants. The oxford dictionary definition defines assets as ‘A useful or valuable thing or person” or “An item of property owned by a person or company, regarded as having value.” So based on this definition your house could qualify as an asset as it is does have value and is worth something, the banks love this definition because it makes us feel better about buying our homes and keeps them in their jobs.
However, from a different financial viewpoint I would like to define assets as simply, “Anything that puts money in your pocket” and liabilities as, “Anything that takes money out of your pocket.” Therefore, your home is not an asset because it takes money out of your pocket each month.
Even if you own your house outright, you still have to pay for council taxes, maintenance and more out of your own pocket. I would define a home as a liability.
The reality is, most people don’t have the luxury of purchasing their house outright! Buyers usually take out long term personal debt in the form of a mortgage, which would require you to make payments for up to twenty five years or more. If you’re unable to make these payments your house will be repossessed by the banks. So technically this is the biggest liability you are taking on. When you buy a home it’s your liability and the banks asset. Monthly you have to make your mortgage payments and monthly the bank collects that money.
There is an exception, properties that are rented out can be described as assets. These put money in your account and in your pocket each month in the form of cash flow. When your tenant pays you rent they cover your mortgage, maintenance, taxes, and more! This type of property can be described as an asset.
This is my personal view if you agree or disagree let me know. It would be great to hear from you.
Roberty Kiyosaki, the author of ‘Rich dad poor dad’ inspired this post and I would highly recommend you read this book.