All of our financial choices come under these two headings: assets and liabilities. As people who want financial freedom in their futures, we’re all about acquiring assets to help us build our wealth. Assets make us money, preferably with minimal input from us.
Liabilities, on the other hand, dig into our wealth and may even whittle it away just as fast as we can build it.
It’s important to learn the difference between assets and liabilities. There can a lot of conflicting ideas about what an asset is because people have different ideas about how wealth is built. We have some curious or outdated ideas about how money is made. Sometimes, we’re suspicious of the ‘official’ channels of money making, or feel like the answer lies in strange and out-of-the-way places.
We feel like if the answer were so obvious, everyone would be rich.
So it’s easy enough to mistake a liability for an asset sometimes, especially when you’re listening to biased advice. This confusion can send you down some pretty fringe paths in pursuit of wealth.
Buying our way to wealth
Some people think of the stuff they buy as assets. This is true of some things. We buy shares in an ETF or in a company on the stock market. We buy a significant portion of our educations. In business, we might buy essential tools of our trade or machinery to start up.
But often, we call what we buy ‘assets’ because we want to justify the purchase as a good financial decision, when it’s not. It’s wishful thinking. 99% of the shit we buy are liabilities. They are there for no other reason than to add to our lifestyles.
There’s a short list of assets and liabilities.
- Investment shares.
- Properties that pay you rental income.
- A business that makes profit.
- Tools and tech that help you perform your job.
- Your own physical/mental capabilities.
Liabilities that definitely do not count as assets:
- Lottery tickets.
- The house you’re living in.
- The car you’re driving (unless it’s a company car or you offer a lift or removal service).
- Tools and tech that don’t help you perform your job.
- Clothes, accessories, shoes and jewelry.
- Expensive art, vintage furniture or almost any form of collection, unless you got it almost free.
- Scrap-metal/that car you’re going to fix up one day/ the junk in your garage you never get around to selling.
Notice that some stuff appears on both lists: property and tech/tools for example. The difference here is that simply having the thing isn’t an asset on its own: you have to use it to make money.
Tech is tricky: I’ve bought a lot of expensive tech toys ‘for my business’. The main question to ask is: would you have bought the thing if you didn’t have the business? If yes, then it’s a liability and nothing to do with your business.
It’s also important to remember that unless an asset it actively appreciating in value as you hold it, simply buying something to sell later is not successful asset-choosing investor behavior. Buy-and-hold works with ETFs and shares. It does not work with computers, horses, boats, paintings, comic books or just about anything else.
It’s a tough call sometimes deciding whether your novelty beer-stein collection is an asset, because you don’t really know until you sell it. In most cases, the likely outcome is going to come as a nasty shock, when the online My Little Pony community tells you exactly how worthless your Gen 1 Peachy Pony really is. Not everything old or ‘first-edition’ is necessarily valuable.
Collecting is pretty fringe as far as building assets goes and it’s not a hobby populated by experts. Most are more accumulators than collectors. Accumulators often way over-estimate how good they are at spotting a bargain. They also overestimate how interested people are in paying them for their ‘find.’
Even if you work for Sothebys and literally do this for a job, it’s extremely unlikely that you’re going to unearth a lost Vermeer at a flea market. As likely as not, you’re going to spend a lot of money collecting a lot of stuff that’s worthless to anyone else years later.
Property is probably the hugest asset/liability we default into without really thinking about whether it’s right for us.
There is an extremely strong cultural impetus in South Africa to be a home or landowner. For many people, especially of our parents and grandparents’ generation, it was a apex of personal success. It was also an expression of success and wealth denied to a huge portion of South Africans until recently.
Owning property is a measure of adulthood for many people in Western culture. We might even feel guilty and behind when we’re not in a position to own our own homes yet, or ever. It may feel like the expected next step to take and we may even experience pressure from parents and our peers to buy property as soon as possible. It’s ingrained in our financial narrative that it’s always the best thing to do with our money.
But let’s take a step back.
For one thing, on a purely sociological level, property is not the market it was in my parents day. Our parents and grandparents have lived through a pretty unique property market and boom. They bought great property really cheaply – which it turns out is absurdly easy when most of the population is prevented from living and buying in their own country – and saw their asset grow to many times its original value. Of course they would be convinced that property is the only asset to go into – this has been their experience.
Present-day Millennial experience of buying property is… somewhat different. All over the world, housing purchase prices did not rise at the same relative rate to our salaries. People are buying later and in many cases, simply not buying at all.
Long story short, buying property can go either way. It can be a great asset, or a truly miserable liability. It’s success is VERY. CASE. SPECIFIC. It’s an asset class – no, it’s ONE ASSET in a highly volatile asset class – that demands a lot of research, experience, patience and not a little luck.
Spending our money where it matters
I’m not against liabilities, in general. A lot of the fun in life is made up of liabilities. But we must buy them conscious of what they are and not what we’d like them to be. They’re expenses; they take away our money and bring us joy instead.
Building our personal wealth is about buying more assets than liabilities, and being wise enough to tell the difference.
Let us therefore not waste time and money being stubborn and buying emotionally or egotistically. Let’s not wander aimlessly around spending tons of money on shit that will never make us a penny back, and call it ‘an investment.’
Let’s do something truly crazy with our money and experiment with buying a reliable old ETF each month instead of Magic Cards.
Article reposted with permission from Drawing Money.