So my last few posts have been more about the things we need to do to start controlling how we spend the money in our lives. Last week, I decided to ask you all how to name the “7 stash” method, and the winner for this is Lauren with the “Money-Pie-Method”. Thank you Lauren!
This method is a suggested framework if you like. Its not the “be all and end all” and you can adapt it how you want. The point is to be mindful of where the money goes, and to put some of it to better use so that it can do more for you that buy you “stuff”.
So the next thing I want to talk about is how you are doing currently.
Do you know what an asset it?
Do you know what a liability is?
Do you know what your net worth is?
If you are anything like I was 2 years ago, you’ll have no idea what I’m talking about. This is a chunky subject, so I’m splitting it into two. This week I will talk about assets and liabilities to give you time to figure out what yours are, then next week we will talk about net worth and where you should be aiming to be. Don’t forget to sign up to my mailing list, and I’ll send you the latest “Doctor’s Money Prescription” with even more info based on today’s blog, including a simple spreadsheet calculator to get you started!
So here goes:
Definition: An asset is something that puts money BACK into your pocket every month and could replace your income if you had enough of them.
- Investment property that generates income (buy-to-let, house of multiple occupation (HMO), holiday rentals, office rental)
- Stocks and Shares
- Royalties from photos/music/books etc
- Businesses you own that you don’t have to be present to produce income
- You! (because without you, nothing works!)
So to dispel a few myths – your car IS NOT an asset unless you hire it out to other people and it brings you income or becomes your livelihood (e.g. black taxi cab is an asset to a taxi driver). Cars depreciate very quickly, and with all the things you have to do and have, just to maintain and keep your car in running order, means that it is just a big drain on your financial resources.
To paraphrase the authors of “Rich Dad, Poor Dad” and “The Wealth Chef”, the house you live in is NOT an asset until you move out and rent it to someone else (even if you have a lodger, you’re still living there, so while having a lodger is great, you cannot count it as an asset). The reason for this is because you wouldn’t be able to sell your house while you’re still wanting to live in it, and it still needs upkeep and the mortgage still need to be paid. Yes it goes up in value on paper, and in that sense you could call it an asset, but it wouldn’t be able to put money back into your pocket every month just yet (you have to sell it first).
It’s a confusing one, because we have been led to believe as adults that we should buy a house and this becomes our pension plan. This is so dangerous. What happens on the day you want to retire, and you can’t sell the house so you have to sell it at a discount? What happens if the property market suddenly crashes when you are retiring and want to sell? The only way a house will help you, is by having nothing to pay to a mortgage company or to a lettings agent when you want to retire. If you can pay off the mortgage, think how much money it would put back into your pocket (and how much less money you will need to accumulate in order to retire well). While money is relatively cheap to borrow, paying off the mortgage now is not your priority. Get your savings and other investments in order, then think about paying down the mortgage. This is a huge topic in itself, so I’ll need to cover it again another day.
Bottom line: your bank owns your house until the mortgage is paid off – it is their asset, and your liability.
What about other assets that many people argue should be included such as antiques, old wine, art and designer watches? Yes these could be included, BUT I WARN YOU, this requires research, knowledge of the market, AND it will only bring you an income once you sell the item, so you need to have a waiting set of potential buyers (which are limited to others who can afford to buy them). I suppose its kind of a savings account in physical form, but the value of them is only an opinion until its sold. Until you can safely say that you have the expertise to know what to buy, you run the risk of buying a load of expensive junk that you can’t sell for the amount you bought it for. Golf clubs, boats and motorbikes spring to mind. These would be what the author or “Rich Dad, Poor Dad” calls “doodads”. Its ok to have these items, but you have to acknowledge them for what they are; expensive toys that won’t bring you in an income. Unless you’re Rory Mcllroy of course.
Definition: Anything you own or owe that takes money OUT of your pocket every month. FYI – having too many of them makes, and keeps you broke.
- Student loans
- Credit cards
- Other loans/cards
- Money you owe to family/friends
I’m sure you’ve got some of these things because you purchased stuff that you love and that’s ok! – I love travelling just as much as the next person, but if you use credit cards and then don’t pay them off, you’ve just generated a liability.
As for your house – I know I mentioned that it is not an asset, but we don’t include it as a true liability in this sense either. It is making money quietly behind the scenes as it goes up in value, so its still a good thing to aspire to, however, until you move out and rent it to someone who will pay your mortgage for you, keep it neutral and out of the calculations which I will go into more in my newsletter tomorrow.
So now its over to you. Can you work out what your assets and liabilities are? If you would like a calculator to help you with working out your assets and liabilities, I will send one out to you if you join my mailing list before 9am on Friday 18th August – sign up at the end of this blog post below!
Good luck, and keep working towards your amazing financial goals!
Until next time,
Dr Nikki x
P.S. I welcome feedback and comments – feel free to let me know what you think below, or come over to the facebook page.