In secondary school accounting, we were told that an asset is something that you own, and a liability is something that you owe. However it left out something crucial; that an asset is something that puts money in your pocket and owning something doesn't necessarily mean that it's putting money in your pocket. An asset or a liability is judged by how the money flows.
When was the last time, your house put money in your pocket?
This is an important insight because many of us believe that when we own a house it is an asset. Worsening this fallacy is that although many people are still paying towards a bond, therefore living in the banks house, they believe that they own the house. Next time you invite me to a braai; you must say I am having a braai at Standard Bank's house or let's go watch the soccer at First National Bank's house.
In my workshops, I have found that when people realise this fallacy, it encourages them to increase their monthly bond instalments because they want to really own the house as soon as they can. There is no rule that says just because the bank granted you a 20 year bond, you have to take 20 years to pay it. Even a small extra amount on your bond instalment leads to significant savings and reduces the time of the bond. Remember the longer you take to pay, the more interest you will pay.
Since the house you live in takes money out of your pocket it is a liability not an asset. Even when you have paid it up, the maintenance costs of the house still make it a liability.
Many people think that moving to a more expensive house means they are getting a bigger asset. However, they are actually getting themselves into a bigger financial problem. Especially those that move often from a bachelor, to a town house, to a free standing house in the suburbs. Your money is flowing into something which you believe is an asset. But actually you are now trapped, because unless you sell that property and downgrade, you do not have something that can put money in your pocket. Most people can never bring themselves to downgrade because of the societal shame this brings.
"Bazothini abantu ..." (what will people say?)
While people might get a 20 year bond, the frightening reality is that after 10 years of being home owners, most of them still owe huge amounts on their mortgages because of this pattern of moving constantly. This is because after nine years of bond repayments you are probably just getting to about half of the total amount owing on the bond.
I am not saying do not buy property, but do realise exactly what you are buying. It is a great achievement and noble goal to buy a property but do not think that it is in the asset column while every month it takes money out of your pocket.