The Cash Flow of Assets and Liabilities

Robert Kiyosaki’s book Rich Dad Poor Dad was one of the first personal finance books I ever read. Regardless of what you think of Kiyosaki the book does have several practical lessons on how to manage your financial life with the intention of building wealth. Let’s be clear, Kiyosaki is an entrepreneur, so some of his wealth building methods aren’t exactly appropriate for everyone. Methodologies aside my biggest take away was the lesson on how to think about the things we purchase as a means to build wealth.

Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. [1a]

Kiyosaki differentiates assets and liabilities in a fairly simple way. Assets are anything that generates income while liabilities are anything producing expenses. Here’s his list of assets:

1. Businesses that don’t require my presence. I own them, but they are managed or run by other people. If I have to work there, it’s not a business. It becomes my job.
2. Stocks.
3. Bonds.
4. Mutual Funds.
5. Income-generating real estate.
6. Notes (IOUs).
7. Royalties from intellectual property such as music, scripts, patents.
8. Anything that has value, produces income or appreciates and has a ready market.

But this definition is different from what is typically used in finance and accounting. The more traditional definition of “asset” is anything owned by an individual that has market value. The difference is subtle, but important. In particular, personal use assets such as cars and houses typically appear on a personal balance sheet as assets since they have market (monetary) value, but they also generate expenses…

I need a vehicle to live my daily life. It certainly produces no income and generates expenses: fuel, insurance, maintenance, etc. Furthermore if the vehicle was purchased through a loan there’s the additional cost of financing. Additionally the monthly payments add a drag on future disposable income. Cars also do not appreciate in value, in fact they greatly depreciate the moment you drive them off the lot. Using data from the National Automobile Dealers Association I was able to quantify the impact on my recent purchase of a Ford Fusion. My brand new 2015 Fusion retailed for $24,370. A used vehicle of the same model year with 100 miles on the odometer had a trade in value of $15,575–a 36% decline in value after only 100 miles. Ouch!

Primary Residence
I’m being careful to separate real estate from primary residence as certain real estate transactions certainly qualify as investments. Like cars, the house we live in produces no income and generates expenses in the form of insurance, taxes, maintenance, etc. But you have to live somewhere. I typically hear two primary arguments favoring the purchase of a home over renting: 1) buying a home allows you to build equity in the home and 2) homes appreciate in value and act as an investment. However, I feel there are more factors that need to be considered.

Purchasing a home is likely to be the single largest expenditure for many families and/or individuals. Few of us are fortunate enough to buy our home outright and therefore must take on a mortgage. Consider the fact that most of the mortgage payments made in the first few years actually go towards interest with very little going towards the principal. Building equity in a home primarily applies to those that stay in their home for long periods of time due to the amortization of principal and interest.

Here’s a quick example using some rough numbers applicable to my area (Chicago ‘burbs) to show the financial implications. If you have good credit a $250,000 30 year fixed rate mortgage is currently available at around 4%. Monthly payment for principal and interest comes to $1,193.54. This doesn’t seem too bad compared to rental prices in my area. However, adding taxes and insurance as well as private mortgage insurance (if the down payment was less than 20%) quickly escalate the cost. Add a few hundred dollars more to that monthly payment and $1800 to $2000 probably isn’t out of the question. After ten years, you will have paid a little over $90,000 in interest and only $53,000 on the principal–still owing approximately $197,000. When it’s all said and done you will have paid almost $180,000 in interest over the 30 year term.

Homes do appreciate in value, but historically they have seldom if ever appreciated in real (after inflation) value–meaning they have appreciated at roughly the same rate as inflation. The Case-Shiller real home price index shows this trend in the US since 1890. The rapid increase of home value that occurred in the 2000’s was an anomaly and not the historical norm. Even if a home were to appreciate in real terms there are other considerations that need to be accounted for when accessing the market value of a home. For one it cannot be easily converted into cash in an emergency (in financial speak it’s not liquid). Turning a home’s value into cash requires the house to be sold, and this not only can take time but cost money–further decreasing any potential return.


Purchasing a home as a primary residence is a huge decision and most likely involves other factors besides the straight financial calculations. For me it exists in a gray area between asset and liability as it has characteristics of both. Jason Zweig of The Wall Street Journal recently wrote an excellent article regarding the true value of a home

A home is more than an investment. It is the place that helps shape who we are. Your generation may well be thankful that you don’t have to bear the burdens of owning one — the mortgage, the maintenance, the pain of pulling up roots that run decades deep. My generation, and my mother’s, are thankful we had the blessings. [2]

There’s no problem with financing a vehicle or purchasing a home through a mortgage. They’re necessary for us to live our lives. However, attempting to justify their purchase as a financial investment and not understanding the true costs involved is likely to lead to disappointment down the road.

I currently rent, but some day I will own a home. When I do I plan on purchasing something reasonable that I plan to live in for a long time with with a decent down payment. Purchasing too much house with the justification that it’s an investment didn’t work out very well 10 years ago, and if I had to guess it won’t work out well in the future.

1. Kiyosaki, Robert T. Rich Dad Poor Dad. Warner Business Books. New York, NY. 1998.
(a) p. 58
(b) p. 89
2. Zweig, Jason. The Real Value of a Home. The Wall Street Journal. November 27, 2015.

S&P/Case-Shiller Real Home Price Index: