If I asked you to name your biggest asset, what would you say? Nine out of ten people say it is their home. I also hear things like gold, their IRA, their cars, their RV, or their 1952 Mickey Mantle baseball card. This is also how the banks think, and they sell you on this idea of what an asset is when you’re doing your balance sheet. The problem is, not only are these things not assets, but they could in fact be disguised liabilities. The traditional way of calculating your net income needs to be tossed out. It’s outdated, inaccurate, and a potential liability to your true net worth.
The old method has you list all of your assets – everything could sell for cash. Then you would go on to list everything you owe – from mortgages and auto loans to credit cards, medical bills, college loans and more. The difference between those two lists would be your net worth.
This approach is dead wrong, and it comes down to something very simple. You could have a big house worth a million bucks. It has a mortgage of $500,000, so, you figure you have $500,000 in net worth. But do you really? The next day you lose your job. Are you going to be able to get a loan on the remaining equity? No, because you no longer have a job and your house is a pretend asset. You lost your job, but you still have to pay the mortgage, utilities, homeowner’s insurance, and property taxes on it. All of a sudden, this house you thought was your main asset is a big, fat, huge liability, and you’re stuck with it. I see clients get into financial trouble over and over again because somebody told them their biggest asset was their home, and they figured the biggest home they could buy would create the biggest asset. But as the old saying goes, if you’re starving, you can’t eat your house.
Cars, like houses, are also liabilities. An asset puts money in your account. You could take that money and you could exchange it for groceries. That’s an asset. If you can eat it, if it can feed you, it’s an asset. Liabilities starve you. They take the money out of your pocket. They destroy you. I have seen many families and many businesses get overwhelmed by those liabilities. They have a house that they couldn’t afford and expenses that they couldn’t pay for. It slowly bled them to death until they were in bankruptcy or foreclosure. That false asset mindset puts good people into bad situations. Your house is not your biggest asset. It is a liability. The asset is that actual mortgage. Unfortunately, it is the bank’s asset, not yours. Like many Americans, you’re buying a liability with a liability, and that’s always a bad idea.
What about the argument that an education—despite its cost—will financially benefit you long term? The answer becomes a numbers game for consideration. For the most part, there is some value to getting a degree. But it’s not guaranteed, and it doesn’t work the same way for every field. A college degree, on average, is going to increase your earnings over a lifetime by about a million dollars, so is the expense worth it today? Is it worth the $200,000 to $300,000 that some schools can set you back? If you invest $100,000, you should have around a million bucks after thirty years. If you pay $100,000 for your degree, it’s probably worth it in the long term. If you pay $200,000 and all you’re going to do is increase your salary by a million dollars over your lifetime, then maybe it’s not such a good idea—remember that million-dollar figure is the average. In my work, I look at people’s balance sheets every day, and I see the impact of these decisions. I have numerous clients that are decades out of their institutions, and they’ve yet to really make a dent in the principal balances on those student debts. They cannot get rid of it. That is not a cliché because student debt is almost impossible to discharge in bankruptcy. It will follow you around the rest of your life if you are not careful.
I’m not saying homeownership or receiving a college education are bad financial decisions. However, how you obtain them, what you do with them, and whether they are currently an asset to you may be different than what the traditional idea of net worth told you.