Why Your Home May Be a Liability, Not an Asset

Institutions profit significantly from our financial uneducation. The economic system is designed to keep the majority of people poor and to benefit from their financial struggles. This isn't a conspiracy theory—it's a reality that becomes apparent when you understand how money works.

Banks, for example, profit when you're in debt. If you have credit card debt, your bank is making money. If you're overdrafting, your bank is making money. If you're spending money on cars or homes you can't afford, your bank is profiting from the loans and interest. The more debt you take on, the more your lender benefits.

Corporations also profit from financial uneducation. They want you to buy their products, and they employ the smartest marketers and MBAs to convince you to do so. Even if you can't afford something, they offer financing options, allowing them to sell more products and make even more money. Corporations benefit when you're financially uneducated because it enables them to sell more.

Governments also benefit from financial uneducation. If you're financially uneducated, you're more likely to be an employee and a consumer. The U.S. tax code, for example, taxes income differently depending on its source. If you earn a million dollars as an investor by selling stocks, you pay around 20% in taxes. However, if you earn a million dollars as a doctor or surgeon, you could pay up to 50% in taxes, depending on where you live. Employees pay the highest tax rates, while investors and business owners pay less.

Additionally, the government's balance sheet reveals that student loans are the number one asset. Student loans, which are often criticized for holding people back financially, are also a major source of funding for government spending. This creates a contradiction where student loans are seen as both harmful to citizens and beneficial to the government.

It's easy to feel anger towards banks, corporations, and governments, but it's essential to understand how the system works so that you can use it to your advantage. Some people use debt strategically to buy businesses or rental properties that generate income. Others use banks to hold their money in high-interest savings accounts, earning interest rather than paying it. It's important to learn how to navigate this system rather than letting it control you.

Corporations will always want to sell you things, but you have the power to decide whether to buy them. Just because a store has a sale doesn't mean you have to spend your money there. By being financially educated, you can make informed decisions and use your money to your advantage.

The U.S. system, despite its flaws, offers opportunities for those who understand the rules. The tax code, for example, benefits the financially educated, the wealthy, and business owners. While this might seem unfair, you can either get angry about it or learn to use the system to your benefit. Understanding how money works is like learning the rules of a game—once you know the rules, you can play to win.

Most people, however, are playing the game without knowing the rules. They work hard every day, only to find themselves with little money and no financial freedom. To break out of this cycle, you need to change how you think, what you learn, and what you do. This will allow you to live a different life, one where you can use the system to your advantage.

It's important to avoid the consumerist mentality that encourages compulsive spending. Instead, focus on delayed gratification and investing in things that will provide financial freedom and mobility in the future.

Regardless of where you are in your financial journey, whether you're just starting out or already well-off, there are fundamental principles that everyone should understand. Building wealth is not rocket science, but it requires financial education and the willingness to make sacrifices.

First, you need to earn money, whether through a job, business, or side hustle. Second, don't spend all your money—saving is crucial. The more you save, the wealthier you'll become. Third, use the money you save to buy assets, not liabilities. Assets put money in your pocket, while liabilities take it away.

Understanding the difference between assets and liabilities is key. For example, a vacation is a liability because it costs money without generating any income. Similarly, a home can be a liability, especially if you don't understand the real estate market and the financial risks involved.

In summary, financial education is the key to navigating the economic system successfully. By learning the rules of the game, you can use the system to your advantage and build a life of financial freedom.

Prior to the 2008 financial crisis, most people assumed that home values only went up. The reason why everyone calls their home an asset is largely due to the training realtors receive. As a former realtor, I can tell you that we're taught to emphasize that a home is the biggest investment you'll ever make. This mindset encourages buyers to stretch their budgets, thinking that they'll build wealth through homeownership. They might opt for a bigger or nicer home, believing it's an investment in their future.

However, once you move in, the expenses begin. You want to upgrade the kitchen, finish the basement for a man cave, or renovate the bathroom. These projects turn your home into a money pit. You're paying for maintenance, property taxes, insurance, and mortgage—none of which give you a return until you sell the home. Even then, there's no guarantee you'll sell for a profit. If you refinance, you have to repay the money with interest.

That's why it's better to think of your home as a liability, even if it technically qualifies as an asset because of the equity. The dollars you invest in maintenance, upgrades, taxes, insurance, and mortgage don't return to you until you sell, and even then, there's no guarantee of profit. If you must use debt to access the equity in your home, it’s not an ideal situation.

Instead of pouring money into a home, I prefer to invest in real assets that generate income, like businesses, stocks, or rental properties. Some might argue that these investments can fail too, but my mindset is different when I buy these assets. I'm not buying them to live in or create memories; I'm buying them to make money. For example, I buy rental properties to generate cash flow that covers expenses and puts money in my pocket. I buy stocks because I believe they'll appreciate or pay dividends—literally depositing cash into my bank account every quarter.

Yes, sometimes these investments will lose money. Every good investor experiences losses, but that's how you learn and eventually make more money if you keep investing. The key steps to building wealth are: make money, don't spend all your money, buy more assets than liabilities, reinvest the cash flow from your investments, and continuously find ways to make more money.

For example, if you're paying $500 a month for a car, you should also be investing at least $500 a month. When your investments start making money, resist the urge to spend it on luxuries like vacations or new cars. Instead, reinvest it to stack your assets, which will ultimately build your wealth. Make yourself rich before you enrich luxury brands like Gucci or Louis Vuitton.

Financial discipline is crucial, and while it's tempting to upgrade your lifestyle as you earn more, delaying gratification leads to greater satisfaction in the long run. I don't always follow this advice perfectly, but I believe in the principle of making yourself rich first. This discipline lays the foundation for a comfortable financial future.

I call it a decade of sacrifice. If you're willing to spend less and earn more during this period, you can invest aggressively and build a wealth foundation that allows you to spend more freely later on. It's like building a snowman: at first, the ball of snow is small and progress seems slow, but as you keep rolling it, it grows faster and larger. This is the compound effect at work.

In the beginning, you may not see significant returns. A 10% return on $1,000 is just $100, but a 10% return on $100,000 is $10,000, and on a million dollars, it's $100,000. The percentage stays the same, but the dollar amount increases dramatically as you invest more. That's why you need to be aggressive early on: spend less, earn more, and invest more. When your investments generate income, reinvest it to accelerate your wealth growth.

Once you realize that your investments can make money without constant effort on your part, you'll want to own more of them. Initially, I focused on cutting expenses to free up more money for investing. But there's a limit to how much you can save by cutting costs. Eventually, I realized that earning more money was the key. There's no limit to how much you can increase your income, whereas there's a cap on how much you can save.

To boost your income, consider getting a raise, a promotion, or even switching careers. You might need to acquire new skills, go back to school, or start a side hustle or business. While this requires effort, it can significantly change your financial trajectory. The goal is to earn more so you can invest more and build wealth faster.

As you earn more, create a system that adjusts your spending, savings, and investments in proportion to your income. For example, a 75/15/10 plan suggests that for every dollar you earn, you spend a maximum of 75 cents, invest at least 15 cents, and save at least 10 cents. This way, as your income grows, so does your investment and savings, allowing you to enjoy life while still building wealth.

Ultimately, the goal is to buy more assets. This doesn't mean you can't indulge in nice things, but make sure you're also prioritizing investments. Before making luxury brands rich, make yourself rich.