Sunday, June 19, 2011

Mythbuster: Is your house or car an asset?

Is your car an asset?

When you approach the bank for a loan of any type, they always ask you to complete forms covering your income, assets and liabilities.

Income: Money coming in
Assets: Investments that appreciate over time and brings money in
Liabilities: Debts and money owed, causing you to pay money out

At the end of the day, the accountant's definition of an asset simplified, is any item/investment whether tangible or intangible, that you own and control that can be sold and converted into money.

Technically your car is considered by the bank as an asset, however it's not the best type of asset to have. Its value depreciates(decreases) over time and it requires you to constantly pay money to maintain it and drive it around.

I never consider my car as an asset because it doesn't generate any income and it really is a big noose around my neck figuratively speaking in terms of all the upkeep expenses. I'll never know its resale value until I try to sell it so how can I include it as an asset when I'm unsure of its resale value?

Is your home an asset? Not according to Robert Kiyosaki.

Robert Kiyosaki (author of Rich Dad, Poor Dad) created an uproar when he wrote that your house is a liability.

Technically the banks consider your house to be an asset. So why did Kiyosaki write that your house is a liability?

He considers the house to be a liability because you live in the house, pay money to fix up and maintain the house AND it doesn't generate an income for you unless you rent out a few rooms or rent out the entire house.

The house is unlike a car because its value generally increases over time so personally, I use it in my calculations as an asset.

I know housing in the US and the UK has had a crash lately but at the end of the day, looking long term in a few decades time as population increases, housing price(particularly land value) will increase and someone will want to buy it from you. Whereas your car will be an utterly worthless piece of junk in a few decades time.

Although it sounds like I'm being anal and making a huge fuss over nothing, if you cruise the PF blogs and check out what other blogger's net worth is, you can't quite compare the bloggers because some omit the car and the house, some omit just the car and some include both.

All of them will tell you whether they include the car or the house because they're just as anal lol Anyhoo, just thought I'd do a bit of myth busting on the topic of cars and houses and whether they're assets or liabilities.

Cheers x

3 comments:

  1. This is really educational in some way. Plus it is an interesting way of teaching it to us. I did learn from this.
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  2. Alternate fact: cars are not black and white asset/liability. I would add the opportunity cost. I would think of the situation like a return on investment, where, if I do not have a car/motorcycle to commute to work, how much will I spend on public transport over a period of time. Then I will calculate the amount of money I spent on the car (purchase, upkeep, fuel, maintenance, travel expenses - if there is a positive cash flow, then the car is an asset otherwise, it is a liability)

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    1. Well written and logically stated. I absolutely agree with you that yes it is an asset technically by accounting standards and financially. However, because it is constantly depreciating and the resale value may not reflect the written down value, I personally prefer to just leave it off my personal balance sheet. I like my net worth figures to be slightly more on the pessimistic side than the optimistic side so that if disaster and unexpected problems occur (ie: when shit hits the fan), then I definitely know which 'asset' I have that I can liquidate to meet repayments.

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