As I look around at my peers and friends, I find that many of them are unable to correctly distinguish between an asset and liability. Some of my buddies are accumulating liabilities at an alarming rate, all the while thinking that these things are assets and will “pay off in the long run.”
In this article, I want to describe some of the most commonly misconstrued “assets” and the devastating financial impact they can have on your personal balance sheet.
Granted, some folks are quite content to sacrifice their balance sheets for the comforts and luxuries I list below. I’m not suggesting that these things are wrong, but I will state that the items below should NOT be considered “assets” and should be recognized for what they are: insanely expensive luxuries that can delay higher objectives (like financial freedom) indefinitely.
3 Negatively Cash-Flowing ‘Assets’ That Devastate Finances
“Asset” #1: A Financed Car
I myself am guilty of this one. Even an “economy car” like a 2014 Toyota Corolla is a huge financial hit when financed new. Payments will continue for years, plus leverage against a depreciating asset (meaning taking out a loan to pay for the car, when there is a 100% chance that it will decrease in value over the duration of the loan) is a surefire way to compound losses over time.
A while ago, I tried to sell that exact vehicle mentioned above. I quickly found that folks aren’t interested in buying a brand new car from an owner who’s had it less than two years. Turns out private buyers are distrustful of my motivations, and of course, I would never get a great deal from a dealer. It was a painful financial lesson that I won’t be forgetting anytime soon.
A financed car costs a tremendous amount of money per month, and in addition, incentivizes the use of vehicle transport more often because of the huge fixed expenses that come with owning a car. (“Well, I already paid for it. I might as well use it!”) This hurts your wallet even more in the form of variable expenses like gas, maintenance, parking. That’s not to mention the subtler financial burdens of frequent driving, like increased insurance premiums, and of course, the risk of a collision that increases with every mile driven.
If you can’t afford to pay cash for your car, then it is probably a good idea to question whether you can afford to own a car in the first place. There are plenty of alternatives to owning and driving a car regularly that are employable by the vast majority of Americans. Don’t make the same mistake that I did.
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