Traditionally house and cars are considered to be an asset, but as ‘Rich Dad Poor Dad’ got published, people start considering the house as a liability. If you check for this in Investopedia, they considered the house is an asset. All these different opinions create confusion in the minds of a normal person. All the financial gurus and NBFCs have different opinions about whether the house is an asset or a liability.
In this blog, we will gonna clarify which concept is correct or which concept is suitable in what condition. Before that, if you are looking for loans for small business then reach out to Vistaar Finance, one of the best small business NBFC in India.
Definition of Asset and Liability as per Robert Kiyosaki
According to Robert Kiyosaki, an asset is anything that puts money in your pocket, whereas a liability is that takes net money out of your pocket.
If simply said your net cash flow is positive, it is counted as an asset and if your net cash flow is negative it is counted as a liability.
To clarify that Robert Kiyosaki had given an example.
There is a person who builds a house by taking a 40 lakhs house loan and for that loan let’s assume he is paying an EMI is Rs. 40,000 per annum.
If he rents that house for Rs. 50,000 per annum, and paying out house maintenance costs of around Rs. 3,000 that person will gonna be in positive cash flow. Hence that house will be an asset for that person.
But if that person lives in that house in that case he/she will not get any rental amount, hence the cashflow will gonna be negative for him and he/she is continuously paying out EMI. So in this case that house will gonna be a liability for that person.
This example is also well suited for a car or any vehicle.
Definition of Asset and Liability as per Investopedia
Now let’s take the definition of Investopedia and accounting. According to Investopedia asset is defined as, a resource with economic value that an individual, corporate, or company owns or controls with an expectation that it will provide future benefits.
Liability is something that a person, a company owes, usually a sum of money.
From the above definitions, the definition of liability is pretty similar for both Robert Kiyosaki and Investopedia but the asset definition is very different.
If we consider the same example as we had taken above, if that person lives in his own house and didn’t receive any positive cash flow at that time but in future, that person can sell that house, hence the house is considered as an asset in the second scenario too.
The major difference between the two definitions of an asset is, Robert Kiyosaki is only considering money and cash flow whereas accounting and Investopedia are considered economic value.
Anything which one buys may not pay you out or provide you a cash flow but it can do provide some economic value in the short or long terms. Like you buy a house for your own, it may not provide you rent or any cash flow but it does provide comfort, security, and also saves money which you were giving out as rent if you were living on a rental basis. This is also well suited for a car too, it saves your time, also to some extent transportation cost, giving you comfort, etc.
Hence the house and car are considered as an asset. We too consider house and car as an asset, and any accountant even the accountant of Robert Kiyosaki might be putting his houses and cars in the asset column.
It doesn’t mean that Robert Kiyosaki’s definition is of no use. This definition can benefits you financially. Try to invest and put your money in those things only which provide you some financial benefits.
I hope that this confusion got clear in your mind.
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