Contrarian look at liabilities
The prevailing opinion from financial advisers is that people should avoid spending money on liabilities and instead solely focus on acquiring assets and building their net worth. Acquiring assets will lead to an increase in a person’s net worth, and in the event of a financial hardship, assets can be sold off.
Assets also tend to increase in their worth as time goes by. That’s a contrast to liabilities, which experience a decrease in their worth as the time goes by.
This black and white interpretation of the role of assets and liabilities in building wealth does not take into account that not all liabilities are figurative “money suckers”. Meaning, not all liabilities will negatively impact your financial situation. From a certain angle, some liabilities can help in building your wealth. Here’s an analysis of those liabilities.
All types of debt is categorized as a liability. Be it a personal loan, consumption loan, or a business loan. Debt and all the additional payments that come with it is a very costly long-term liability. To simplify, debt is the payment a person imposes on himself or herself because of their inability to pay the full sum. A person pays more just because they weren’t rich enough in the first place.
Although starting a business is risky, and no one is safe from a bankruptcy, starting a business is one of the most straightforward ways of building wealth. It’s hard to get rich solely from wages. However, it’s much easier to get rich if you’re the one who is paying other people their wages, and using their labour in turn.
Therefore, business loan, although is a liability, is worth considering. If you have a viable business idea, a great business plan and knowledge to start a business, a business loan shouldn’t be viewed just as a liability. It’s more of an opportunity to build wealth and later, acquire assets.
If it’s possible, crowdfunding and angel investors should be the initial funding source (apart from your own money). However, not all businesses are exciting enough for angel investors or anonymous people on the internet. Hence, a business loan may be the right choice and a worthwhile liability for some people.
Loans for education
Although getting a university degree these days won’t propel the graduates into the upper classes, it at least guarantees a lower middle class lifestyle. That is, if the degree is in a high demand. For art and humanities degrees, it’s a completely different story.
A right degree with enough demand in the labour marketplace justifies a loan. If it means doubling or tripling the income of a person just with a degree, a loan is more than worth it. Of course, it’s sad that loans may be the only way for some people to achieve a higher income. However, everyone’s looking to make money, and in this case universities and colleges aren’t an exception.
Studying at a less prestigious institution or working and studying may help to avoid such a large liability as an education loan. However, if it’s not possible, a loan for a degree is worth it.
Not to be confused with using your home as collateral for mortgage (which is a very risky move, and could result in a person becoming homeless).
Real estate, aside from places where people are moving out, is a safe investment in a appreciating asset. There’s almost no risk, and apart from fearing a new burst of a housing bubble, investors don’t have many worries when buying houses or apartments.
A short term mortgage is a better financial choice than a long term one. The monthly payments are higher, but the overall amount the owner pays will be less in contrast to a long term mortgage.
The most important thing to remember is that it’s imperative to pay the monthly payments and to never skip them. Otherwise, the loan will increase just because of the debtor’s tardiness.
Buying a house or an apartment without any loans is certainly better than acquiring a large liability in the form of a mortgage. Renting is also a great choice for most people. In certain real estate markets renting, nonetheless, is the worse choice than buying a home with a mortgage.
Car in special situations
A car is one the worst liabilities that’s often viewed as a necessity. Using public transportation, however awful it may be, never even comes close to the costs of owning a car. This blog examined ways to save on transportation. All other methods of transportation are better than the liability of car ownership. Car ownership becomes an even larger liability when a loan is used to buy a car.
For some people, despite the costs of owning a car, using this mode of transportation is the only choice. Not all people have the privilege of having a house in a city centre or in an area with a lot of jobs, stores and governmental facilities. Some people have to deal with travelling long distances just to get basic necessities.
For those people, a car is a liability which is worth its money. There’s no rationality in not having a car if it’s the only way to get a well-paying job or to access facilities such a as hospitals and schools. All other people should avoid buying a car. Petrol costs, insurance, payments to mechanics and unexpected costs increase the costs of owning a car significantly, and make it an unattractive liability to most people.
Investing in health is a method to offset future healthcare costs. Going to the gym helps to become happier and healthier in the present. Becoming more energetic, losing weight, and gaining muscle are the benefits a gym membership offers.
Although many people buy a gym membership and do not use it later, it does not mean that a gym membership is a wasteful liability. Every person has a varying sense of discipline and personal accountability. Others may be too lazy to fully use up a gym membership. But remember, others aren’t you.
Multiple studies show that physical activity will help you become more healthy (1,2,3), happy (1,2,3) and energetic (1,2). A gym membership is an easy way to commit to regular exercise, and therefore maximally improve your mood and health.
Alternatives to going to the gym are home-based exercises and outdoor activities such as hiking and running. They usually cost less than a gym membership. There is a financial incentive to go to the gym to exercise when you have bought a gym membership. There isn’t one however, when you exercise at home or outdoors. If that’s your choice, it’s important to remember all the benefits physical exercise offers.
The trap of liabilities
Many people try to justify spending money on liabilities as “investments” for their future. However, there is a significant difference between buying new furniture or going to the spa regularly and getting a loan for going to the university. It’s important to avoid the trap of justifying unworthy liabilities as “alternative” investments.
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