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Why Your House Is Not An Asset

From a cash flow perspective, it’s actually a liability.

Andrew Padoa

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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.

Financial independence

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.

Related: When Should You Start Panicking About Retirement?

Andrew Padoa is a Portfolio Manager at Sasfin Wealth in Durban. He holds a B. Com Honours degree from the University of South Africa and an Advanced Post Graduate Diploma in Financial Planning Law from the University of the Free State. Andrew provides the East Coast Radio Market Watch at 7:30 AM on weekdays. He is part of the Sasfin Investment Committee- the team that constructs and manages local and global share portfolios for clients. Visit Sasfin Wealth for more information.

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6 Comments

6 Comments

  1. Francois Botha

    Oct 29, 2012 at 08:57

    If you make up your own definitions for ‘asset’ and ‘liability’ then you can do what you want. You could call those definitions apples and saucers for all I care, but in the real world, there are already preexisting definitions for assets and liabilities and those are used in the compilation of a balance sheet.

    • Knowledge Elisha

      Mar 6, 2014 at 15:01

      in finance and accounting an asset is defined as ” a resource which a
      firm owns or control, the use of which result in an inflow of economic
      benefit” and a liability is an ” obligation, which at settlement results
      in an outflow of economic benefit”. if your house result in an inflow
      of some economic benefit, its an asset but otherwise its a liability

  2. Jonathan Pohl

    Oct 29, 2012 at 09:36

    He has used a ‘simple unconventional’ definition from Robert Kiyosaki’s book so in my opinion being quite valid.

  3. Juanvs

    Oct 31, 2012 at 10:34

    What rubbish! You still have to stay somewhere and accommodation is not cheap. So you would rather pay off someone else’s property and have nothing to show for it at the end of the day? Consider what you would pay to replace your rented accommodation with your own property. Even if you have to pay slightly more, it is still yours. Over time it will appreciate in value and provide security in hard times. You may use it as leverage to acquire another property or buy a business. If you have nothing, the banks and financiers will find it very hard to provide finance for any project that you may want to embark on.
    I have a problem with financial advisers who know nothing about economics and twist the facts in order to sell their products.

  4. Marno Slabbert

    Nov 2, 2012 at 21:43

    Which would be the bigger liability ..? Paying off a home the smart way by not over extending oneself, controlling cost, paying off debt, keeping a good credit score, being able to pay in more which is “saved” and you can use it if you want plus reducing interest, not having the costs and waste off time to move when the owner of the house you rent decides to sell the property etc etc OR never owning, always renting, and ending up with the same cash flow anyway!

  5. Annie Malcayo

    May 12, 2013 at 03:04

    If you buy your house cash and then the price went up after few years then I say you made a good money, but this is not the case most of the time, some people can only afford 5% or even zero percent down. In this situation, you basically burn all your money to the interest. Remember if you have a house you have to pay interest rate, utilities, insurance, property tax, maintenance, upgrades and so many unseen expenses ( you should anticipate to replace your ac, furnace, roof, painting, plumbings, appliances, gardening expenses and many more) and if you breakdown these expenses in monthly that would be around $400-$500. Most of the people who have houses actually don’t have money, they just merely rely on the equity but what if the price of the houses plunged? then your screwed. Another thing is the “STRESS” most of the people who owns houses have lots of financial stress and emotional problems. Again the above statement is not applicable to everyone, people who earns good money may have different case, but most of the people are making just above minimum wage. I’m not saying that you don’t buy a house but make sure that you’re in the right financial situation in case you have to do it. The good thing with house is that you will have a place that you will call your OWN but it is NOT an investment, because when you say investment you are about to make a profit and as I’ve said before you will be pouring out a lot of money just to maintain your (house) investment!

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Personal Finance

(Infographic) The Financial Advice Millennials And Gen Zers Want To Know

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful. And that starts with getting the right advice.

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Whether it’s saving for retirement or paying off credit card debt, money management can be a challenge. Of course, different people have different concerns – and that often comes with age. While a 60-something baby boomer might be organising their savings for retirement, your 20-something millennial might be focused on paying off student loans.

In a recent study, financial intelligence company Comet surveyed more than 1 000 people to uncover the top financial concerns of various age groups, as well as the financial advice millennials and Gen Zers want to know and what they hear instead.

Overall, saving for retirement was the top concern across all age groups, with saving for an emergency and affording monthly bills following in second and third. However, it’s no wonder these are some of the most pressing worries – according to the research, 23 percent of people admit they don’t have a savings account, and 43 percent reported not being on track towards their retirement goals. Perhaps that’s because they didn’t hear the right advice growing up. At least that might be the case for Gen Zers and millennials.

According to the research, these young people want to learn things such as how the stock market works, how to manage an investment portfolio, how to invest in real estate and how to build credit. Instead, they’re simply told how to create a budget, save for retirement and pay credit card bills in full every month.

Related: 7 Critical Things Your Financial Advisor Must Meet

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful and comfortable. To learn more, check out Comet’s infographic below.

1532099434_2-cents-worth-infographic

Related: Financial Wellness Coach Nelisiwe Masango Shares Retirement Wealth Advice

This article was originally posted here on Entrepreneur.com.

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Personal Finance

14 Ways To Make Quick Cash On The Side

If you need money quickly, here are some solid ideas.

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Need to make some fast money on the side, whether it’s to pay off a credit card or to make your rent?

Keep in mind, making quick side cash isn’t about making a lot of money or getting rich. It’s about getting a shot of capital to help tide you over and put something extra in your pocket. However, some of these side-income ideas can build up your wealth over time. There’s many ways to accomplish this: By participating in the gig economy, the sharing economy, online sales networks, passive income techniques and more.

If you’re looking to make extra money in a relatively short period of time, check out these 14 slides.

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Personal Finance

Take Advantage Of Financial Democracy Made Possible By The New Stock Exchanges

Why should financial democracy matter to entrepreneurs?

Etienne Nel

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Because it creates a society able to afford products and services. Without it, even the innovative products and services that are entrepreneurs’ bread and butter will fail.

What is financial democracy, exactly?

It’s both the right and the ability of the (wo)man in the street and business people to make the decisions that affect their financial circumstances.

Financial democracy does not automatically follow political democracy. For almost 25 years after South Africa’s political transformation, the exclusiveness of our financial markets continued to deprive the vast majority of South Africans of the means to invest, save, and build wealth. South Africa has, therefore, never developed a retail stock exchange environment. So, it has deprived the majority of small and medium sized business of access to capital.

For entrepreneurs to truly flourish, they need a mechanism that easily and seamlessly connects the investor pool with every size of business. And, they need affordable ways to enter both the retail and institutional market.

In short, they need stock exchanges. Ones on which listing takes weeks rather than years, doesn’t break the bank for listing fees, and provides the shortest route to the largest possible potential investor base.

That’s not been possible in the stock exchange monopoly that existed for six decades. Now, it is.

What’s changed?

We now have four new stock exchanges. The resulting competitive environment will significantly reduce the cost of listing – and the cost for investors of buying and selling shares.

Instead of restricting share trading to people or organisations who already have tens of thousands of rands to invest or millions to spend on listing, by licensing four new stock exchanges, the Financial Services Conduct Authority (FSCA, formerly the FSB) has recognised that most financial decisions do not call for high levels of education.

Related: The Role Of Foreign Exchange In The Economy

Most people know how to spend their own grocery money. Most know that it’s better to keep their R1 000 monthly income in a coffee jar than spend R50 of it on bank account fees. People who can barely read and write are immensely skillful at manipulating air time deals to their advantage.

There is significant financial savvy in all social strata.

In the same way, although the mechanics of bookkeeping and accounting may be unfamiliar territory to many entrepreneurs, most have a clear understanding of the difference between profit and loss.

The FSCA has therefore enabled democratisation of the financial markets by enabling the broadest possible spectrum of entrepreneurs and investors to use stock exchanges to participate in and contribute to the economy – on their own rather than prescriptive terms.

How do you take strategic advantage of this democratisation?

  1. Base your business strategy on people’s instinct for making decisions in their own best interests. Trust financial decentralisation, such as one sees in crowd funding and in digital environments such as block chain, where people would far rather trust one another than institutions and governments. This is democracy innately at work in the financial environment and it’s accelerating organically as digital technologies give people more means and the confidence to help themselves – to information and opportunities. Ride the wave.
  2. Tap into people’s desire to innovate. Consumer organisations have proved that letting people interactively help them develop products is a powerful growth engine. Apply the principle by letting people grow your business by buying shares in it, giving you capital and themselves a platform on which to build wealth.
  3. Remember, the ultimate loyalty reward is equity.

Your financial democracy business plan

Look to list on an entrepreneurial stock exchange; one that was founded by entrepreneurs on entrepreneurial principles.

That means: A stock exchange that is already built on financial democracy and decentralisation. One that has, at its core, a single operational concept that keeps things simple for you, automatically gives you an immediate competitive advantage, and, ensures that no matter what your business needs in terms of attracting capital, the exchange can provide all the options in the same, consistent way.

What does such an exchange look like?

It has fintech capabilities. So:

It slashes your listing costs. It achieves this, among other things, by enabling you to populate an electronic prospectus, demonstrating your financial viability, and self publish.

It gives you control by having the granularity and agility to impose relevant governance right down to the individual investor. You get to decide the types and quantities of investors you want to attract. This also enables you to achieve black economic empowerment in perpetuity.

It leads the world by clearing and settling trades in T+0. No-one in the value chain has to hold large sums of money for days following a transaction. Small transactions become profitable. Investors don’t have to risk their life savings on a single large trade. A retail market is opened. An investment and savings culture is entrenched. The economy expands. Your business grows steadily.

It enables anywhere, any time trading via a mobile app that allows investors to see share value in real time. See economy expansion point above.

It integrates processes and procedures, simplifying them and ensuring rapid onboarding of issuers and, therefore, speed to market with new concepts and alignment with the digital economy.

It operates a principles-based regime. So:

It treats you, as an executive, with respect. It’s not prescriptive. It does not insist on excessive oversight, allowing the Companies Act to guide you to sustainability.

It does not attempt to squeeze your company into a pre-defined business or listings format. It recognises and works with your uniqueness.

It obviates the need for expensive specialist listings advisors.

It focuses on financial inclusion and access. So:

Shares can be bought and sold for no more than R1 000. See economy building point above.

Related: 27 Of The Richest People In South Africa

The new world of stock exchanges is integrated, synergistic, holistic, organic, self-fulfilling

Decentralisation of financial control, democratisation of opportunity leads to a whole new economy. One in which, for instance, a taxi operator can finance a minibus through a company in which his purchase gives him shares. A single purchase gives him two benefits: a vehicle on which to found his business and a longer-term investment in shares that he can trade. The funding company gains liquidity through access to a wider base of investors while being able to control who buys and sells and the conditions on which trading takes place. Increasing black equity in business becomes an organic, natural, self-perpetuating process.

Everyone wins in a decentralised, democratised financial market. And it’s the stock exchanges that drive the process.

As an entrepreneur, can you afford to ignore the acceleration that listing could give your business growth?

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