Re: Things The WATCHTOWER never taught you - assets v. liabilities

How do you tell the difference between an ASSET and a LIABILITY?

Well, jokes aside, one very good and very simple test is this:

"An asset feeds you, and a liability eats you."

To apply this test, imagine a situation in which the asset/liability was left on its own, with no action form you.

Although I strongly believe that it is a great idea to own your own home, I disagree with those who say that a home is an asset. It doesn't pass the test. Left to itself, your house will eat you.

Even if your house is completely paid off and you have the deed in your hot little hand, your house and the land it is on is a liability. It eats you with maintenance costs and with taxes.

Remember this simple test when the guy at the boat dealership is trying to talk you into how much you need the asset that he is so unselfishly offering you.

Many things that people think of as assets are really liabilities when viewed in this light.

I'm sure not everyone agrees with this test. I invite you to make your case here.

Nathan, I have enjoyed your posts on money management. I would like to add to your comments on assets. An asset is a resource that can be used. Rather than comparing assets to liabilities you really should be comparing assets to expenses.  Expenses are resources that you have used and can never use again.

Using this model a home meets the test of an asset, which it is. 

You next need to compare your asset to liabilities. As long as assets are greater than liabilites you have a thing called equity. Equity is a very good thing and is the beginning of "creating wealth."

The basic accounting equation:

Assets = Liabiliites plus owner's equity.   The sum of income and expense becomes owner's equity (or lack thereof if your expenses are more than your income).  

Your home is an asset.  However if the cost of mortgage interest and maintaining it exceeds the principal payment plus gain in market value, your equity is going negative.  This is what happened to all those people that refinanced their homes fifteen times to take out money to buy boats, cars vacations etc. 

While I agree with your principle, in a couple of years when our house is paid off, it will only cost us $900 a year in rates.  An equivalent rental would be $16000pa.  Granted, we will have paid $200K for the privilege of living for free, but that's for life.  I like the idea that, presuming we can keep our jobs for just another year, we have a very low risk of homelessness (termination payments would wipe the mortgage out). 

The truth about owning a home though is that the physical house is a consumer durable (it will wear out and need replacement, it just takes a lot longer than a washing machine).  It's the land that appreciates in value.  Good land is always an asset. Buy great land land and build an adequate house on it.  When you need to use it as your retirement fund, it will still be great land.  Ok, unless it's in Detroit.