Your House is an Asset, by Definition
There is no shortage of motivational influential personal finance investing pages on Twitter and Instagram looking to get your follow and your like for whatever they happen to post that day. These pages tend to highlight key concepts at an extremely high level and Target average or less than average people to briefly entertain or educate them. I constantly see pages like this posting messages like the following:
“Things that put money in your pocket are assets, things that take money out of your pocket are liabilities”
The ideas that these pages promote are not necessarily bad in and of themselves. However, I believe that they are oversimplified to the point where they are detrimental to anyone who is serious about learning about the subjects. If you take a look at any of the above images and try to explain it to a CPA or anyone who understands accounting, they will laugh at you.
The reason why I'm so passionate about this and the reason why I believe it so harmful is because the type of language in this type of quick like-generating image isn't teaching enough of the right information. To the rest of the financial world, there is more to it than “Asset=Good, Liability=Bad.” This oversimplified language appeals to an average person who does know much about financial terms and isn’t likely to check to see what is actually being said.
Before you start typing your hateful email to me, let’s look at the statements, and see where the information is lost:
“Things that put money in your pocket are assets, things that take money out of your pocket are liabilities”
While the message is simple enough and easy to follow, assets can have value other than immediate cash flow. For instance, properties can appreciate in value or stock prices could go up. Neither of these represent immediate cash in your pocket but are assets by definition. I think that the message people are trying to convey here is that people shouldn’t be spending money on things that continue to take money out of their pocket without careful consideration. But that doesn’t sound as sexy…
“Your house is not an asset, it is a liability”
This is wrong by definition. If this is confusing, read up on the definition on investopedia before going further. Since the message is so often said in ways that are grossly oversimplified. Let me provide additional context to make the message clearer:
Your house is an ASSET, assets like your house can appreciate and depreciate in value depending on how much it is worth on the open market. Many people choose to finance their home purchase with a mortgage, which is a LIABILITY. Property owners need to make payments towards this liability each month or they risk losing their home in a foreclosure. The payments made each month on the mortgage are split between the mortgage principal (the liability) and interest (an EXPENSE - the cost of borrowing money). Additionally - property taxes, repairs, and maintenance are additional EXPENSES incurred with property ownership.
The cash outflows related to the mortgage are generally the largest cash outflows for a person or household, and not managing cash outflows properly is one of the most crucial killers in personal finance, which is why so many personal finance websites try to highlight these areas. Because of this, the message that “a house is not an asset” may very well be the easiest way to deter less financially literate people from making a decision that can ruin them down the line. As a result, the technically incorrect and oversimplified statements like these can help tons of people by leading them away from what might be their downfall. At the same time, they can lead people away from the proper understanding that paves the way for future success.
By being able to see and differentiate the ASSET (the home), the LIABILITY (the mortgage principal), and the EXPENSE (mortgage interest, property taxes, repairs), you can make smarter decisions about your choice to purchase a home or rental property. Remember, there’s more to it than “Asset=Good, Liability=Bad,” by knowing exactly how the funds flow and what the real assets and liabilities are, you can set yourself up for success down the road.