Technology, Money & Questions

On the surface most of us will be clear about what does asset and liability means. Traditionally, an asset is something that appreciates in its value over time, and a liability is an obligation to pay money to another party or legally responsible for a debt. With this traditional notion of asset and liability we've always been told that our house is an asset. Of course, it is an asset, everybody is correct about that. But, they never tell us whose asset it actually is.

Most of us who are salaried always consider our house to be the largest investment in order to get some relief from taxation [Nevertheless, salaried employees are the people who end up paying more tax. In most of the countries, always the lowest earner end up paying high taxes. That's actually a separate topic altogether]. And the worst part is, most of the times they give 20% down payment from their pocket and take up a housing loan with their house as the mortgage.

Now comes the best part, you bought a house, your largest investment, with 20% down payment from your pocket, thinking that you got a tax rebate along with an asset of your lifetime. But, on the course of your investment you have actually created a liability in the name of an asset because of your housing loan.

According to Rich Dad, Poor Dad, anything that brings cash inflow is an asset and anything that takes money from your pocket is a liability. If you think about this idea for a minute, you will get a whole new perspective towards your expenditures. Suddenly, it would dawn on you that buying a posh car is actually a liability since it takes up bulk of your money and doesn't gives you anything of monetory value in return. With this new definition for asset and liability, it becomes clear that your house is a liability for you and an asset for the bank where you mortgaged your house.

See this in fresh light, you pay your monthly installments along with interest to the bank for your mortgage. You bought a house with some investment, and end up paying interest to the bank. This is a clear indication that your house on mortgage is not an asset according to our new definition. And in the bank's front, your house actually attracts interest to the bank. It brings in money every month, and hence it is an asset for the bank rather than you. On top of this, you will have to pay the property taxes to the government every year and do not forgot about the maintenance charge.

According to me, your house becomes an asset only when you actually sell it and get more money than what you paid on the course of acquiring the house and it includes your interest paid to the bank, property taxes and money spent on maintenance. Till then it is a liability on your side.