How To Convert A Liability Into An Asset
My assertion in Rich Dad Poor Dad that your house is not an asset created a lot of controversies. In fact, I received more angry mail about that than any other point in my books. I often say, “When your banker says your house is an asset, they are not lying to you. They are just not saying whose asset it really is. Your house is their asset.”
If you look at a bank statement, it becomes easy to see just whose asset your house really is—the bank’s.
Most people do not own a home…they own a mortgage. Those who are financially educated understand that a mortgage doesn’t show up in the asset column on the financial statement. It shows up as a liability. But it does show up on your banker’s balance sheet as an asset as you pay the bank interest every month.
Remember rich dad’s definition of an asset, “Anything that puts money in your pocket. A liability is anything that takes money out of your pocket.”
As I mentioned earlier, if you look at your bank statement every month, you’ll see that your home puts no money in your pocket and takes a heck of a lot of it out. This is true even if your house is paid off. Even after you pay off your mortgage, you still have to pay money every month in the form of maintenance costs, taxes, and utilities. And if you don’t pay your property taxes, guess what can happen?
The government can take your home.
So, who owns your house really?
This is not to say you shouldn’t buy a house. I’m simply trying to help you see that it is not an asset. Rather it is your home and should be enjoyed for that, not as your ticket to a secure retirement.
Look elsewhere for that.
Truth sets people free, and the truth that your home is not an asset but instead a liability is one of the most important truths you can know.
Rich dad had many definitions for financial intelligence, such as “the ability to convert cash or labor into assets that provide cash flow.” But one of his favorite sayings was, “Who is smarter? You, or your money?”
For rich dad, spending your life working hard for money only to have it go out as fast as it comes in is not a sign of high intelligence. You may want to review the cash-flow patterns of a poor person, a middle-class person, and a rich person presented in chapter ten. Remember that a rich person focuses his or her efforts on acquiring assets, not working harder.
Due to their lack of financial intelligence, many educated people put themselves into positions of high financial risk. My rich dad called it “the financial red line,” meaning income and expenses are nearly the same every month. These are the people who cling desperately to job security, are unable to change when the economy changes, and often destroy their health with stress and worry. And these are often the same people who say, “Business and investing are risky.”
In my opinion, business and investing are not risky, but being under-educated is. Similarly, being misinformed is risky, and relying on a safe, secure job is the highest risk anyone can take. Buying an asset is not risky. Buying liabilities you have been told are assets is risky.
Asset vs. Liability
If you stopped working today, meaning your salary stopped, from where would money flow into your pocket? Most people I explain this to for the first time reply, “Nowhere.” There’d be no money.
An asset may be a rental property that has a positive cash flow. It may be a business in which you invested that gives you cash flow every year. It could be a stock that pays a dividend. The key is that it is an investment from which you receive money on a regular basis—it provides positive cash flow.
On the flip side, a liability is something that takes money from your pocket. So, if you stopped working, chances are your car would take money from your pocket each month through car payments, gasoline, and maintenance. Your home would take money from you each month in the form of a mortgage payment, property taxes, insurance, and upkeep. These all provide negative cash flow.
The problem is the majority of people who buy houses do so as a primary residence, not as a rental property. So let’s break down what that looks like financially.
On a given month for your personal residence, you need to pay for your mortgage, utilities, maintenance, taxes, insurance, and possibly more. Sometimes these can turn out to be huge costs, for instance, if you need to replace a roof or your main plumbing line collapses.
All of these are things that take money out of your pocket. And as rich dad taught, a liability is something that takes money out of your pocket.
Many so-called experts will point to things like paying down principle, tax breaks from mortgage interest, and appreciation as reasons why the house is an asset, but paying down principal is simply saving and savers are losers, the tax breaks for your mortgage do not offset the costs that go out of your pocket each month, and if you’re banking on appreciation, you’re basically gambling, as homeowners in the Great Recession painfully discovered.
How Kim Turned a Sailboat Into An Asset
When Kim decided she wanted a sailboat, she began to investigate ways that would allow her to purchase the boat and turn it into an asset. Instead of just letting it sit in dock in Hawaii and writing checks every month to pay for the maintenance and the loan on it, we put the boat into a charter company. When we’re not using the boat, it’s chartered throughout the Hawaiian Islands. The money from the charter business pays for the expenses of the boat.
We do the same thing with our vacation house in Hawaii. It’s a beautiful house, but since we live in Arizona, we’re not there much. So, we rent the house out most of the year for thousands of dollars a day. The cash flow easily pays for the expenses of the house, and then some. Once again, we found a way to essentially combine assets and liabilities.
And the best part is that we get to enjoy the boat and the house whenever we want to, all paid for by the businesses we turned them into.
Editor, Rich Dad Poor Dad Daily