Veterans aren’t strangers to the concept of assets and liabilities. One of the first things anyone does when thinking about personal finance is to map out their assets and liabilities into a personal balance sheet. The result is personal net worth.
But how accurate is your balance sheet? What common liabilities are often left off the balance sheet because they aren’t considered financial liabilities? And how can an improved understanding of liabilities give you better understanding of financial risk?
Your Home: Asset or Liability?
Perhaps, you have accomplished one of the milestones of the American Dream: home ownership. Your real estate agent, like many others, probably lauded your new home as an ‘asset,’ even if you have a mortgage. Yes, a home can offer some stability and a place to build memories. It can also appreciate in value as time passes. But, beyond the mortgage, what liabilities does the home create?
Defining Assets and Liabilities
Before we delve deeper, let’s reacquaint ourselves with the definitions:
- Asset: It’s something you own that has value.
- Liability: It’s a debt you owe now or in the future, including costs associated with the upkeep of your assets.
The Ongoing Costs of Ownership
Your home sits in the asset column, however, it comes with a list of liabilities when you consider all the ongoing investment and maintenance it demands. Let’s look at a short list of some ongoing costs of the home:
- Property Insurance
- Property Tax
- Lawn Care & Landscaping
- Appliance Repair
- Appliance Replacement
- Termite/Insect Prevention
- Exterior Repairs (Roof, Siding, Tuck Pointing)
Many of the items on this list aren’t optional. You could cut corners occasionally, but proper home maintenance is necessary to maintain the home’s value. Some or all of those costs are shifted away from you when you rent the home you live in.
The Hidden Liability
Let’s use some numbers to consider the impact of home ownership costs on your balance sheet. Imagine you purchase a $400,000 home using the VA loan benefit to finance the purchase with no down payment.
Normally, your net worth wouldn’t change. You have a $400,000 asset with a corresponding $400,000 liability. As you pay off the mortgage each month, your net worth increases as the mortgage balance decreases, assuming there are no changes to the market value.
With that in mind, let’s consider those “hidden” liabilities of home ownership. We could make detailed estimates of all the ownership costs associated with the home over the time of ownership, let’s say 10 years.
We add up all of those costs and make some adjustments for inflation—for this hypothetical scenario, let’s say the present value of the home ownership costs about $100,000. By the way, financial planning software or a spreadsheet can help with this analysis.
As a result, the moment you signed the title for this new home, you decreased your net worth by $100,000.
You bought yourself a $100,000 liability along with your asset.
Other Examples
The scenario with a home isn’t so different than a car, another commonly misunderstood asset. We know a vehicle loses value almost immediately after being driven off the lot. Maintenance, insurance, and depreciation all add up, increasing the actual cost of the car far beyond the original purchase price.
An example that hits close to home with your author is racehorse ownership. In the racing business, yours truly often states that a “racehorse is a liability until it proves itself to be an asset.” For those unfamiliar, training costs for a racehorse tend to run $3,000 to $4,000 per month. That horse is just a cost (from a financial perspective) until it starts winning races.
Making Informed Financial Decisions
The key takeaway is that assets come with liabilities. It’s up to you to understand and quantify these obligations. Then, you can decide whether maintaining or purchasing the asset makes sense.
Ultimately, the question isn’t just whether your assets have liabilities attached—it’s about having a handle on the true financial picture. Here’s where a strategic approach can make all the difference and safeguard the financial health you’ve worked so hard to achieve.
Understanding Your Total Cost
The actual cost of ownership is rarely the sticker price—you need to consider the overall investment, including ongoing maintenance, repairs, and insurance. By mapping out these costs, you’ll have a clearer sense of how your assets impact your liabilities and whether or not you can afford those assets.
The Takeaway
As you navigate the major purchases or financial planning in general, be deliberate about understanding the nuances of what you own and how it impacts your wealth. Your home and your car can indeed be assets, but they also comes with liabilities. By understanding the true cost of ownership and assessing potential appreciation, you’ll move one step closer to financial freedom.
In the grand calculus of your finances, the hidden details of the big decisions can make or break your financial health and financial future. So as you consider the investments in your life, don’t blindly accept assets as such—always question whether they bring you closer to your financial goals.