Many people believe that the home they live in should be considered an asset. However there is a school of thought who is adamant that your home is a liability. A simple way of looking at it, popularised by Robert Kiyosaki (author of Rich Dad Poor Dad), is to focus on cash flow.
From a cash flow perspective, anything that increases our cash balance would be considered an asset. Anything that decreases our cash balance would be considered a liability. In this alternate way of looking at things, an asset is something that puts money in our pocket and a liability is something that takes money out of our pockets.
The law of liabilities
So our house, even if it is paid off, is still a liability. Why is that so? We still have to pay rates, levies, insurance and maintenance on our homes. So they are actually costing us money.
Many people may protest and state that the value of their home will increase over time. However, this is not always the case. South Africa has over the past decade had a property boom which has resulted in home owners making substantial gains in property value.
It would be naïve to believe the growth achieved over the past decade would be constantly achieved in the future. There are many homeowners who are currently in financial distress as they owe more on their homes than what they’re worth.
Related: Peace-of-Mind Financial Planning
Not an investment
The value of your home may be irrelevant. You only receive the value of the home when you sell it. Many people retire in their home and will live there until they pass away, so their heirs will receive the benefit of the increased value of the property.
Our biggest monthly expense is probably our monthly bond repayment. And for many people, having to pay off a bond will take away the ability to invest in assets that provide an income.
The cruel truth for most people is that their home is in fact not an asset but rather a liability. The point of this article is not to discourage you from buying a home, but rather to make you aware that you could make a serious financial error if you are purchasing your home with the idea that it is an investment.
To have future financial independence, we should have income from multiple sources. In order to do that we need to increase our assets by investing in shares (which pay out dividends) or perhaps purchasing a property which is rented out by a tenant and produces a positive cash flow after all costs have been taken into consideration.
Or even studying further, which could enable us to earn a higher salary. Financial independence will not come from purchasing multi-million Rand homes, purchasing boats and motor cycles, and using every penny to pay off our debt.