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Assets vs. Liabilities


I recently read two blog posts that raise an excellent point about the true nature of assets and liabilities. Owning stuff does not always translate into owning assets. For example, a house that is underwater is not an asset -- it's a liability. On the outside, it may appear to be an asset, but more often than not, that underwater home is an immense financial strain on the person who owns it. 

Similarly, a car with a monthly payment of $500 (leased or owned) is absolutely not an asset. Setting aside the cost of maintenance, vehicle loans are almost always losing-sum games for the purchaser. Why? Because vehicles lose value the moment that they leave the car lot. By the time the purchase price + interest is paid off, the investment value of the vehicle is long since exceeded. 

In addition to these obvious liabilities, everything that you've purchased with a credit card is a liability until the balance is paid off. This means that those groceries you charged last week (and have already eaten) remain a liability on your books even after you've burned the calories at the gym. 

These types of liabilities can make someone appear to be outwardly wealthy, but true wealth is represented by liquid cash, valuable investments, and things you own that are not encumbered by credit. If you're in a situation where you have lots of stuff and loads of debt, then you may want to consider filing bankruptcy. Clearing out your liabilities clears the path towards acquiring true assets. Keeping up with the Joneses is not as attractive when you discover that the Joneses have $3,000 in assets and $800,000 in liabilities. 

H/t to Sam Glover and Daniel Gershburg for the inspiration on this one.