One of the biggest problems in financial literacy is knowing the difference between assets and liabilities. Assets pay you for owning them, while liabilities require you to frequently pay into them. The basic idea of financial security is to buy assets in which pay you more than your needs and liabilities.
1) Savings Accounts
Ok, *clear throat* so remember that your money is decaying by 3% annually. Does your bank provide an interest rate greater than that? If not, it is not investment, but storage. A savings account is like a well stored seed while an investment is a mended crop. One should be available in the future in hopefully the same quality you left it, but there will be some effects of age. Assets need to grow in value, not decay nor even stay the same. Therefore, savings accounts are technically liabilities.
High Interest Banks
Many argue about some banks that provide higher interest rates like Ally at over 2%. First of all, good for them. Second, that is still below the inflation rate. Third, while they rightfully claim they have no maintenance fees, I saw a fee called “account research fees.” When I held my cursor over this it said: “If you request extensive research on transaction histories, we may charge you a $25/hr Account Research Fee. We’ll let you know before we start if that fee will apply.” It at least sounds like that if you have any concerning transactions, they will require you to pay to have anyone look at these transactions. In other words, if someone broke their security and used your money on an unauthorized transaction, you will have to pay for it and it is not cheap.
Just do not look at savings as investments, you will loose a little bit so if anything it is a liability. If you have any fees, they are especially liabilities. I highly recommend using your savings for your emergency fund and maybe large purchases.
2) Personal Home
I and many others argue that a personal home, or one not meant for cash flow, is not an asset. It is in fact, a liability. Think of what you get a house for, do you get it because it is something you value, or because others will value it?
My older brother recently obtained a house. He wanted a new bed room for his second child. Legally this room requires a window. He had to pay people and sometimes even spent his own time to place up this new window. I have looked up how much people spend on their new house for repairs or modifications. Zillow reports that home repairs, modifications, and utilities cost an average of over $6,000 and sometimes more than $9,000 annually. These include adding windows, roof replacements, insulation, pool care, landscaping, flood repairs, heating tank replacements, *phew.*
The House Value Will Decrease With Some Changes
The sad thing is while that window cost quite a bit, the biggest concern was the affect on resale. My brother is afraid that by adding this window he has lowered his home’s value. I find this ridiculous that just adding something you value to the house will cut the total value of the house. A real estate agent said that most of what people add to their homes including hard wood floors and a more advanced kitchen have merely emotional value. If you try to ask for a higher price to your property with these additions, most people will laugh.
While a home is a good thing to own and can provide many benefits, do not expect it to give you a profit. While you can sell the house for a higher value later, you are selling the roof over your head and one way or another you will have to pay for that again, unless you want to be homeless. That is my argument that a house is a liability.
This is a good thing. Instead of worrying about the price you will get back for the house when you are rid of it, you can focus on making it yours for the present.
Many people buy goods including watches in hopes that someone else will buy it for more money. These are liabilities, like practically every consumer good people can buy, they are far more likely to loose value than gain them.
Most collectibles have no intrinsic value. Essentially, the value is determined by the seller and buyer, usually by bartering or auction. There is a severe lack of guarantee for returns with collectibles.
This is illustrated by the endowment effect. It states that the value of something you own could (and most of the time) does not reflect the value you hold to it when you do not own it. For instance, one of the latest collectible crazes are with Disney VHS tapes, particularly from the classics collection. Apparently this certain tapes in good condition can costs thousands of dollars a piece. There is one I saw that someone is selling for $15,000. This is not an ad, I just wanted to show it to illustrate the point. Now here is a question, knowing that your tapes could cost a small fortune (apparently) are your tapes now more valuable to you?
Some may say yes, but now think of it, would you pay $15,000 for one of those tapes? What about $1,000? $100? Would you even pay $10? It is far more likely you will buy these tapes out of nostalgia from a garage sale or flea market for maybe $2, probably less. The point is collectibles rely almost entirely on someone having a higher value than what you paid for, and you will be surprised at how few buyers actually line up to pay for these.
Collectibles are liabilities because of other costs including proper care, storage, and even appraisal. Also, unless you hire an expert to check every collectible you purchase before said purchase, it is likely that some of the collectibles will have flaws that make their value lower. Or, you could have a counterfeit and it would be worthless altogether.
There is however, one collectible in which I see people making some return with and it is not a liability. I will bring it up in a future post about setting up businesses with little or no cash (and do not worry, this collectible is not losing value too soon).
Blackjack, slots, Texas hold’em, lottery tickets (yes, especially those those) all count as gambling. Remember how in the stock market, you will gain an average of 9.8%, well for gambling in a casino, the average loss is 5%. According to Forbes, if you want lottery tickets, you should expect to lose $0.32 for every $2 ticket (16% loss). There are plenty of people who say it may be worth more when the jackpots are higher and others do not, I will not choose either side. However, someone once to me “I could put a dollar into an investment while you buy a lottery ticket, I am still more likely to be a millionaire than you.”
Overall, no matter which way you look at gambling, neither one is as likely to make you rich as practically any asset.
5) Consumer Goods
I have mentioned this many times before, but many of the goods you buy are liabilities. Your car will loose over 50% of their value in 5 years. Practically everything else you buy will loose value. Remember that many things you can buy for your house will not increase your value.
I do not buy much, because one of the most common things I hear from financially smart people is that the poor buy liabilities, the rich buy assets. By buying the assets and avoiding liabilities, you will forge your wealth.