Some personal finance gurus such as Robert Kiyosaki claim that people should "buy assets, not liabilities". This made me wonder: is it even possible to buy a liability? From what I have observed, everything I have spent my money on is either an asset or an expense. I am not aware of having bought any liabilities.
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In this sense, a liability is something that would cost you additional money to continue to own, or otherwise hinder your financial position.
To quote Kiyosaki directly (and explicitly explain this particular usage of the word "liability"):
An asset is something that puts money in your pocket. A liability is something that takes money out.
A classic example is a shiny new car. You may pay tens of thousands of dollars for a new car, and arguably it is in fact worth that much, but as soon as you drive away with it, it becomes a used ("pre-owned") car, and is worth significantly less.
If you use debt (a loan) to purchase such a vehicle, you can easily end up in the position where the sale value of the car is less than what you owe on the loan, and it will actually cost you money to sell it (you get some money from the sale, but not enough to pay the loan, and need to come up with additional money to settle the debt).
Aside from the underwater sale scenario, keeping the car will cost you money. You need to pay for fuel, maintenance, insurance (which will be more expensive than for an older vehicle), and possibly recurring tax (based on jurisdiction; also likely more expensive for newer cars than older). Additionally, if you use a loan to purchase it, you will have to pay interest on the loan.
For another popular example, see boats ("the two happiest days in a boat owners life are the day he buys it and the day he sells it").
Cloudy
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The definitions in the book are:
An asset is something that puts money in your pocket and a liability is something that takes money out of your pocket,
Buying real estate is an example of an asset - you make money off of the rent you charge for living in it. Stocks are usually an asset, as they can go down in value, but in the long run they should appreciate so long as you don't have too much risk in your portfolio.
A car is (usually) a liability - they cost money to operate. However, you get utility from the car if it allows you to get from place to place cheaper than alternatives (like public transit). So by the author's reasoning, you should have as cheap of a car as possible, and not "splurge" on a fancy car, as it costs more than its utility. If you have a car payment, then it's almost certainly a liability.
A boat is definitely a liability, unless you're a commercial fisherman or are able to make money off of having a boat.
So the idea is to invest money in things that make money, not waste money on things that don't. Now certainly we all want to enjoy life and buy things that would be considered "liabilities", but the concept is that the more "assets" you buy versus "liabilities", the wealthier you will be.
D Stanley
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In his book Rich Dad , Poor Dad Author Robert Kiyosaki mentions to "Buy Assets not liabilities". Asset means something that appreciates in value over time and Liability means something that depreciates in value over time.
To make it more clear, lets take an example of iPhone.
The latest version of iPhone , iPhone 13 Max Pro was launch on Sept 17 2021 with launch price of $1099 for 128 GB variant pre-taxes in US. The value of that same device is much lower than the price it was purchased on. It can be considered as an Liability. Price of same device is $974.99. (Source :- Used iPhone 13 Pro Max)
On the same day, the price of Apple Stock , the company which sells iPhone amongst other products was $146.06 (Split/Bonus adjusted) and as of writing this article its trading at $173.19 with and additional payout of $0.90 per share in form of dividends (Dividend amounts not split adjusted. Source :- Apple Dividend History). The value of same share has increased approximately 18% excluding dividends. So, this stock/share can be considered as an Asset as it is increasing in value over long run.
onkar
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Kiyosaki changes meanings, to educate.
Yes, Kiyosaki does not use the standard emotional or accounting terms for things. But that is quite on purpose and for the sake of making a point.
For instance, the Navy probably scores it like this:
Asset: Superyacht, SS More Money Than You.
Liability: $100 million bank note on Yacht
Asset: Sprawling apartment complex in Docklands London.
Liability: $100 million bank note on apartments
In the accounting sense, these are the same situation twice. But of course they are not. The yacht is a total loss, no matter how hard you AirBnB that thing, all the hustle in the world will not pay its note and upkeep. But the apartment estate earns more than enough to pay its bank note and maintenance. Kiyosaki's meaning very much takes that into account.
And Kiyosaki's goal is to make you think about that. For everything.
Harper - Reinstate Monica
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One aspect not yet fully addressed is that in the short term and medium term, houses cost money. Ongoing monthly mortgage payments are most families single largest expense. Over a 30 year period, the economy will likely undergo a few recessions and likely a depression. It's common for people to lose jobs and houses to lose significant value during the downtimes. Paying the mortgage can then become very difficult. The monthly cost of owning the house then becomes a significant burden.
My solution- buy a house leaving significant extra in my budget to pay ahead. Also, ask the lender to include a clause that if I pay ahead I can also waive future payments.
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An asset is something that produces value. However, Kiyosaki says
An asset is something that puts money in your pocket and a liability is something that takes money out of your pocket,
This is a rather narrow definition of "asset", as it counts only direct monetary value ("puts money in your pocket"), and disregards less tangible value. According to the principle of revealed preference, if someone buys something, then it gives them value, or at least anticipated value, according to how they have defined value. Saying it doesn't is imposing your own definition of value on them.
Of course, someone can be mistaken as to how much value something will give them. So according to the general definition, one can purchase a net liability by paying more for something than the enjoyment they get out of it, and according to Kiyosaki's definition, they can buy a liability by buying anything whose price is based on personal enjoyment, rather than financial return. So mostly, this is just an obfuscated way of saying "Spend money only on financial investment, and not on anything that improves your quality of life". Which, if your primary goal is to get rich, is I suppose reasonable advice, but as far as actually being happy, is rather problematic.
Acccumulation
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When someone says "buy assets, not liabilities," they are typically referring to making wise financial decisions. In this context, an asset is something that provides value or generates income (Appreciates in Value), while a liability is something that costs money or creates a financial burden (Depreciates in Value).
It's not possible to literally buy a liability, as a liability is not a tangible item that can be purchased. However, people can take on liabilities by making poor financial decisions, such as taking out loans they cannot afford or buying items on credit that they cannot pay back.
For example, if someone purchases a car on credit, they are taking on a liability in the form of the car loan. The car itself may be an asset if it is used to generate income or provides value, such as using it for a ride-sharing service. However, if the car is not being used in a way that generates income or value, the loan is simply a liability that costs money in the form of interest payments.
More importantly, a car's value tends to depreciate over time. See the Used Car Price Trends by Carguru.
Another example of buying liability is smartphones. Similar to cars, phone value depreciates over time. See Used iPhone Price by UpTrade. It's surprising to see how fast the value of a used iPhone drops.
An opposite example is buying houses. Buying a house can be considered buying an asset. Here are a few reasons why:
Potential for Appreciation: Generally, real estate property values tend to appreciate over time, which means that the house you buy today could be worth more in the future. This is not guaranteed, but it is a possibility that can make owning a home a good investment.
Rental Income: If you decide to rent out your property, your house can generate rental income, which can provide a steady stream of passive income.
Equity: When you buy a house, you are building equity. Equity is the difference between the value of your home and the amount you owe on your mortgage. As you pay down your mortgage, you increase your equity in the home.
Tax Benefits: There are tax benefits associated with owning a home. For example, you can deduct mortgage interest and property taxes from your taxable income.
See U.S. House Pricing Trends by Redfin.
Therefore, the advice to "buy assets, not liabilities" is a reminder to make smart financial decisions that will increase your net worth and help you achieve your financial goals.
