Liabilities in Disguise
Not all assets are created equal.
The generally accepted definition of an asset is anything of value that could be turned into cash. I’m sure you’ve heard this, right? Well…I don’t love this definition. I define an asset as anything that can be reasonably expected to put cash in your pocket, or increase in value without holding costs. Liabilities of course include credit card debt, personal loans, etc. However, I believe some assets can be liabilities in disguise.
The first so-called asset that I consider to be a liability is a car. Even if your car is paid off, it’s taking money out of your pocket in the form of gas, taxes, insurance, and maintenance. The Kelly Blue Book value might make it look like an asset, but you might not even get that amount if you did try to sell. Of course cars are necessary for most of us, so I consider them tools to be maintained so they’ll keep running well, but I wouldn’t generally count them among your assets.
My next example is controversial and people do argue this one, but I don’t believe your personal home is always necessarily an asset. Real estate has historically gone up, especially in the last couple of years. But the reality is that your home can take money from your pocket each month when you have a mortgage to pay, renovate or keep up with routine maintenance. Your home’s value may go up on paper, but you’ll only make money if you sell the home and make a profit.
Now, I know homeownership is at the heart of the American dream, and if you want to purchase a home, I will help you plan and budget. But I do want to encourage you to shift your mindset a little when it comes to how you think about your assets and liabilities.
My point here is simply to remember that it’s a good idea to build a well-rounded portfolio of assets beyond material possessions. Find your dream home if that’s part of your plan, but make sure to focus on assets that can also provide economic value such as stocks & bonds. Rental properties can also serve as an asset by making you money after bills and maintenance. Of course keep in mind that all of these can rise and fall in value over time as well.
What questions do you have about your assets vs your liabilities? Give me a call. Our team is here to help.