I was standing at the checkout line in Target on Sunday with my 7 year-old daughter, Allyson. She desperately wanted me to buy the spearmint Icebreaker breath mints. Now I’ll admit…these things are good. But, at $1.99 they are a want, not a need (unless of course I just ate Mexican food.) I decided that this was an opportune teaching moment. I explained to my daughter that Icebreaker breath mints are a liability, not an asset. They cost a lot of money and within a few hours she will have nothing to show for her investment. My comments didn’t stop her from wanting the breath mints but they did make her think.
I can’t really take credit for this clever parable. It just so happens that I’m reading Robert Kiyosaki’s ‘Rich Kid, Smart Kid’ book. Among the many lessons he writes about is the importance of understanding financial statements. Poor people buy liabilities. Rich people buy assets. If we can instill this fundamental concept in our children can you imagine how much better off they will be financially as grown-ups?
As adults we frequently mistake liabilities for assets. Your home is a perfect example. How much are you paying to live there? There’s the mortgage, utilities, HOA dues, repairs, taxes and insurance. Yes, your home will eventually go up in value and if you’ve been paying down principal you may actually have equity. However, when you sell and move away then chances are the next house you buy will have gone up in value just as much, thus negating the increase in value and reduction of principal in your old home.
The same can be true in a real estate market moving downward. My parents sold their house at the peak and purchased a new one closer to me and my family. Within a year the bottom dropped out and they watched values in their neighborhood drop by more than 30%. I did some quick research on their old neighborhood and found values there had dropped by more than 40%. I explained to them that in the end they were no worse off – the market in both neighborhoods was almost identical.
Once you understand this it’s easy to see that your home is not an asset or investment; it’s just a place to live. When you hear someone say your home is an asset they are not lying to you. As Robert Kiyosaki points out in his book, your home is an asset – the bank’s asset.
More assets and fewer liabilities – that is how wealth is created. It’s like Robert Kiyosaki’s Rich Dad once said, “One of the main reasons people work so hard is that they never learned how to have their money work hard. So they work hard all their lives, and their money takes it easy.”