My first introduction to the Financial Independence community came after reading Rich Dad Poor Dad. This book was a fundamental shift in mindset for me where I learned why your home is not an asset. This comes down to one simple principle. Your home is not an asset because it isn’t by definition an asset. Let’s explore the definition of an asset and a liability for further understanding.
Defining An Asset and Liability
There is one and only one critical thing you need to understand. An asset puts money back into your pocket. It is that simple. If you want to read a more complex explanation of an asset, you can click the link above.
Now let’s define a liability. A liability is something that takes money out of your pocket. Again, it is that simple.
Things People Believe Are Assets That Are Liabilities
Now that we have defined an asset and a liability, it is time to better understand things people have mixed up.
The first and most common is someone’s home. If you were to ask most individuals, they would tell you their home is their greatest asset. Let’s take a look back at the definition of an asset. An asset puts money into your pocket. Does your home put money into your pocket? If you aren’t house hacking, the answer would be no; therefore, your house by definition is not an asset. If you want to better understand how to turn your home into an asset, read the article I wrote about house hacking!
Another common thing people think is an asset is their car. Your car takes money out of your pocket through insurance, gas, and common maintenance. For these reasons, your car is also a liability and not an asset.
How To Retire Early
Want to understand how you can become financially independent at a young age? Acquire assets and get rid of liabilities! It is really that simple. Once you have enough assets producing cash flow to fund your lifestyle, you will be out of the rat race. It is really that simple when you boil it down to the nuts and bolts.
The Key Problem With The World We Live In
The main issue with the world we live in is technology. We are being conditioned to believe we need things that bring us no value. These things are liabilities as they all take money out of our pocket. Some liabilities are much worse than others. The large car payment you took on to project a lifestyle you want people to believe you are living. The nice luxury watch you purchased to try and impress people. The larger home you purchased because you want to live in an uppity neighborhood.
These things are liabilities that draw you into a financial trap. You will never be able to get out of this trap if it you continue getting drawn in. You will continue wanting more and more. The last thing you purchased isn’t bringing you happiness which leads you to wanting the next thing. This cycle is an ever ending loop that is tough to get out of.
An asset puts money into your pocket.
A liability takes money out of your pocket
Accumulate assets and get rid of liabilities. This will exponentially fast track you to financial independence.