By Dzogbese Lisa
Dzogbese Lisa is a Nigerian writer whose works range from novels to short stories to nonfiction. She was described in The Times Literary Supplement as "the most prominent" of a "procession of critically acclaimed young anglophone authors [which] is succeeding in attracting a new generation of readers to African literature",particularly in her second home, the United States.
Wow this post really gave me new insights. Really glad I read it. I got hooked at the last paragraph explaining the meaning of liabilities.
Thanks for your comment. Congratulations on your new home! Buying a home is usually a difficult subject to classify as an asset vs liability. A lot of it depends on the price of the house, what country you live in, the interest rates etc… However, I tend to stick to the definition of: If it puts money in your wallet it’s an asset and if it takes money out of your wallet, it’s a liability. So if I were to buy a house using a loan, and I need to pay that loan every month I may think it is a liability. However, if I rent a room in the house, or list it on AirBnb and someone pays me rent every month which covers the loan, then maybe it is an asset.
The reason why I tend to think buying a house with a loan is a liability more than an asset is because owning a home also comes with a lot of other expenses. Other than the initial cost of ownership, there are many costs to maintain the house over time. Expenses like taxes, insurance, repairs, and it costs money to sell it (typically 3-7% in Canada depending on what region). That’s a lot of money to sell your asset in comparison to other assets. For example, a $500,000 house would cost you $15,000 to sell, while the same amount of money invested in a stock in the stock market would cost you around $5 to sell (or free to sell depending on your brokerage). So it costs a lot of money just to get you your own money….
While I know a few people who own multiple houses and who rent them out, they may make money each month, but they also have a huge amount of debt which needs to be paid off and if the rate of interest changes, the bank will take their home depending on the loan agreement.
So I really think it depends on how you use your home, will determine if it’s an asset or a liability. I currently do not own a home, but in Toronto where I live, a single detached house may cost around $1 Million dollars and would still need to be fixed up. Which way do you think about it? Do you think it is an asset or a liability?
We have bought a home but we have taken loan for that… Is it a asset or a liability??
Hi Yana! Thanks for your comment – I’m really glad you found value in this post. I’m happy I explained liabilities in a way that resonated with you.
Buying income generating assets is how you build wealth over time. It can be very temping to cash out and spend money on other fun things (liabilities), but I always remember every dollar I spend on a liability, I’m missing out on putting that money to work for me. And not just the work it could be doing today, but all the years of work in the future especially as money grows and multiplies over time.
You have probably read or heard about Robert Kiyosaki and his uber-famous financial book Rich Dad, Poor Dad. I have some issues with Kiyosaki’s overall up-sell business model, but this book contains a very useful idea for wealth building . Here is how Kiyosaki describes it :
“You must know the difference between an asset and a liability, and buy assets…. Rich people acquire assets. Poor and middle class people acquire liabilities, but they think they are assets.”
Kiyosaki defines an asset as anything that puts money in your pocket. A liability is anything that takes money out of your pocket. The big mistake that poor and middle class people make, according to Kiyosaki, is spending their lives buying liabilities instead of assets. He teaches that if you want to be rich you simply need to spend your life buying assets.