Is your home an asset?
When most people are asked this question, they answer “yes.” But is it really an asset? There are several definitions of what an asset is:
- a useful or valuable thing, person, or quality
- the property of a deceased person subject by law to the payment of his or her debts and legacies
- the entire property of a person, association, corporation, or estate applicable or subject to the payment of debts
Technically, by looking at these definitions, your house is an asset. This conversation should be over, but it’s not. There are other definitions of asset as well:
- a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations.
- Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
Asset or Liability?
All of these are definitions of an asset. However many call their home an asset, when in many instances its actually a liability. A liability is defined as the following:
A thing for which someone is responsible, especially a debt or financial obligation.
So now ask yourself: Is your house an asset or liability? If you believe your home is an asset, ask yourself the following:
- If you lose your job tomorrow, will your home generate revenue for you?
- Can your home help you pay bills?
- Do you have to work and pay expenses to keep it running smoothly?
- If you lose your job, do you risk losing your home because you can’t afford to pay the mortgage?
Depending on your answers, your home could be viewed as a liability, not an asset. If a person owns a home, they still have to pay the mortgage, insurance, electric bills and repairs. In most cases, a person will have to work in order to keep that house. If they lose their job, they risk losing their home.
A False Sense of Security
When people view their home as an asset, they are looking at the value of their home. Technically, this is correct, but it should not be viewed that way. From a wealth and financial freedom perspective, an asset can provide you with a monthly income and help pay bills, not be a bill itself. In other words, a true asset can pay for itself without you having to work to pay for it.
Instead of traditional definitions of assets, a person should look at assets that provide cash flow. Unlike a house, which in many cases can cost a person money, these are the assets that can generate revenue for a person and possibly their heirs for years to come.
Even if a person does consider their home an asset, it would be wise to begin accumulating other assets that can generate cash flow. These types of assets include the following:
- Rental property
- Royalties (books, published music, etc.)
- Dividend paying stocks
It should be noted that traditional assets such as rental property and businesses can become liabilities if their expenses are more than the revenue received. However, it’s possible they could be made profitable over time because they are designed to generate revenue while a person’s primary residence is not. However, a person’s home could be an asset if they rent out a room, thus generating a monthly income.
For the average person, if they lose their job, they risk losing their home. Change your mindset on what an asset is. Start accumulating other investments that can generate revenue for you. This way, if you lose your job or can’t work, these assets can pay your bills for you, and allow you to keep your home.
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