If you don’t understand the difference between assets and liabilities, you will never be able to retire.
What most people think of when the word “assets” is used is a house or a car, but these are not assets… Do you know why?
It’s simple really… when you boil it down. So, let’s define the word “Asset” and then apply it to reality. An Asset is anything you own or control that pays you to own or control it. So by that definition, is your house an asset?
If you’re like most people the answer is a resounding “No”! You house may have a mortgage on it which obviously would cost you money each month. It may also have utility bills, maintenance, and upkeep expenses that cost you each month. These expenses make your house a liability. In this senario… The one in which you have a mortgage, your house is an asset only for the bank that holds your mortgage, and the State (more on this below).
Well, what if your house is paid off? Great question. You still have the monthly expenses for utilities certainly, but more than that your house sits on land that requires you to pay taxes to the State or forfeit your residence. Yep, you must pay your taxes or men with guns will come and force you off “your property”. In this scenario, the one in which you have no mortgage, your house is an asset for only the state. You being in that home on that land means you owe money to the State for as long as you live there.
So, this begs the question… “How can my house become an asset?”
It can become an asset if you rent a portion of it for more money than it costs you to hold the property. Meaning if you charge $1000 per month in rent for your basement suite, and your total monthly expenses are 800 per month, then you have an asset that pays you $200 per month to own or control it.
From this simple explaination, you’ve probably arrived at what a liability is: It is anything that costs you money to posses or control. Now that you know this, it’s easy to see how a car is a liability… Especially a new one.
If you want to retire and retire well… then you want to have control of things that pay you. Real estate, stocks, loans… they can all pay you. And let’s face it, it’s much better to be the payee than the payor.
