Tag: challenge

Asset or Liability

One of the most recent concepts that I have to considered  is deciding whether whether to classify something as an asset or a liability. For example, what is a house, an asset or liability? I think that is a good question to ask and clarify.

 

My understanding is that according to Robert Kiyosaki, author of Rich Dad Poor Dad, an asset is anything that makes money or produces revenue and a liability is anything that costs money. So what is a house? Based on the definition above, a house can be either an asset or a liability. If you rent the house or use it for business purposes therefore it generates revenue, then the house is an asset. However, if the house is a residence and lived in and has a mortgage payment, then it is an expense and therefore a liability.

 

It might be a difficult concept to grasp, because we are often told that a house is an asset. And in a sense it is, because it is worth money when it is sold. When a mortgage is issued on the house, the property is then owned by the mortgage company and the occupant is paying rent or what is often referred to as a note. Therefore the house is an asset to the mortgage company, because it is generating revenue; and a liability to the occupant, because it is an expense and the occupants are making a payment.

 

What about if there is no mortgage on the house? Same rules apply, if the house generates revenue it is an asset, if not it is a liability. Again, for the occupant the house is a liability because of the expenses associated with living in the house. If the occupant is a renter, then the renter makes a payment to the owner. For the owner the house is an asset, it generates revenue; and for the renter the house is a liability, it is an expense. If the owner lives in the house, then the house is a liability because it does not generate revenue. This is because the house only creates expenses for the owner in the form of insurance, taxes, and maintenance costs.

 

Using the definition above it is simple to determine if something is an asset or a liability. If the investment generates revenue, it is an asset; if not, it is a liability.

Sunk cost

I have noticed that we frequently let past decisions keep us from future opportunities. Let me explain what I mean by that statement. We worry too much about the ‘sunk cost’. A sunk cost is when you have already spent time or money, which can never be recovered, on something. I like to include them in the definition of sunk cost, primarily because time is a resource that once spent is gone forever.

An example of a sunk cost is you bought a season pass to a swimming pool. You can never recover the money spent on the pass, all you can do is utilize it to maximize your enjoyment. The money is gone, regardless of how often the pass is used.

One of the most common statements I hear goes something like, “We spent $xxx to do ____, so we cannot do ____.” Now if you fill in the blanks the statement might be, “I spent $10,000 on the car, it is now worth $7,000, so I cannot sell the car because I cannot get what I paid for it.” This is the sunk cost syndrome. We might be clouding our decision making by hanging on to the sunk cost. Maybe the outlook needs to change too, “I can get $7,000 if I sell the card today.” The idea is to not worry about what you spent but to focus on what you need to do moving forward. Another way to view this is to ask, would you make the same decision today?

Sunk cost syndrome creates a situation where we are hesitant to change direction or consider alternatives that had we not worried about the past decision the choice would be simple as well as different. I would suggest that when considering options try to avoid the sunk cost trap and don’t let past, unreversable costs stop what you have planned for the future.

Stop Living in the Past

For all of you who are holding onto the past, it is time to let go, release, and free yourself from that bondage. Living in the past can take many forms, so here are a couple ways that we lived in the past and possible ways to let go and start living for the future.

Debt

When you are in debt you are definitely living in the past. Debt is paying today for what you did yesterday or in the past. This is a terrible way to live. Why would anyone want to pay for yesterdays dinner, tomorrow? So here is how to break the cycle… If you cannot pay for it with cash, DO NOT DO IT!!! It is that simple. There are plenty of free activities to do in every town and neighborhood. For example; I run, usually about 5 miles. This will take me about 45 minutes plus time to warm up and cool down. It cost me nothing and I get some much needed exercise. I also eat most meals at home. These meals are usually healthier and cost less to prepare. Plus, I have a lot of food at the house, which, if I don’t eat will just be thrown in the trash. Make coffee at home, it is really expensive to go to the coffee shop. Watch movies you already won, read a book, get to know your neighbors, sit in a lawn chair and enjoy the afternoon. Write a letter to a friend (not an email). There are many things to do that cost little money to do and give a sense of fulfillment. Getting out of debt is really about changing habits.

Relationships

Many of us hold on to past relationships. This is a tough one, but you cannot move forward if you hold on to the past. Let it go and move on. If you have difficulty, seek professional help. But really, some relationships are not good and never were, so let it go and move forward to a better relationship and a better life.

Clean out the old

This is a fun one and can actually create some money. Have a garage sale or sign up for one of the apps to sell old stuff. A good rule of thumb is, if you haven’t used or worn it in 6 months, get rid of it. You can donate to your favorite charity or Goodwill or sell the items. I recently sold a lot of stuff and was happy to see it go. I reduced the clutter in my life by doing this. Some things you will want to keep for sentimental reasons, be judicious about this and simply keep the things that really matter.

Ultimately, when you clean out the old stuff you make room for new and possibly better. This is true of relationships, furniture, etc. So, is it time for you to clean out the old? It was for me.

Make a decision

Sometimes we spend too much time waffling back and forth about a decision. This is generally referred to as procrastinating. And often we view it negatively. Sometimes it can be good to take time to make a decision, while other times it is best to just decide and move forward. Now let’s consider a when it is good to take time to make a decision, when it is good to be quick and what might help speed things up in the decision making process.

Slow decision time….

It is often good to take time to make decision which have long lasting impacts on you and your family. This might be decisions about buying a new car, making a career change, having children or moving to a new neighborhood and possibly which school to attend. Basically, these are all items which are difficult to reverse or undue. This is when it is good to take a deep breath and evaluate what it is you really want or need. Try to keep the emotion out of the equation. An example is buying a new car. Often there is pressure from others to do that and the reasons all seem legitimate…at the time. But really the only thing most of us need is a car good enough to get from point A to point B. In my situation, that is about 15 miles one way. I don’t need a fancy car to do that. I do however need a reliable car. The difference is the cost.

Quick decision time….

At times it is good to make quick decisions. Like what to have for lunch, or simply deciding not to eat at a restaurant. Deciding how much to put in savings each paycheck. Quick decisions usually have little or no impact on our overall quality of life (yes, I am excluding catastrophic or major emergency situations). These decisions are simple and leave us feeling generally good.

Decisions made easy…

What makes it easy to make decisions? When you know what you need or want and the difference; the decision making process becomes really simple. Going back to the car scenario, if you know what you need and your budget, then you have naturally limited the choices. So, we could say that in order to help the decision making process simple then we should find an easy method to limit the choices. There are three things to consider in the decision making process: values, cost, and does it help me achieve my long range goals? Every decision should be guided by those three considerations. Cost is a twofold scenario of economic or monetary and social. Remember that there could be a social cost associated with a decision. For example are you willing to risk public ridicule for your decision?

Establish your value, which means what you, as a person, are willing to allow in your world. You have direct control over this. You don’t have to buy that car, take that job, or eat that food if you don’t want to. Second always establishes a budget, what you are willing to spend or what the pay at a new job must be. Third, make sure it moves you toward your long term goal. If your goal is to be a millionaire, then buying fast food at every meal probably won’t help you get there very fast.

When you have established these three things you will become very focused and intentional about how you make your decision. Give it a try. Write it down and see how it works for you.