The assumption is that if you’re wealthy, you’re going to buy one of these big houses.
And I think that assumption comes from the misunderstanding—core, foundational, damaging misunderstanding that a home is an asset…
…You need a new definition for what an asset is and what a liability is. Assets put money in your pocket every month; liabilities take it.
A Map
I’m going to share with you a map today that’s based off the Five Laws of Gold from The Richest Man in Babylon by George Clason. We discuss this at least a couple times a year. I read a couple of articles on the Five Laws of Gold.
I’m going to synopsize some of those for you as well as share with you some of the ridiculous stuff that people are saying out there when they try to somehow convince people that George Clason and the Babylonians would have thought that the stock market was a good place to invest their money. That’s a reach.
That’s a big reach because what these guys did—including the actual parables that are taught in The Richest Man in Babylon—they went to individuals and invested money with individuals. They didn’t just hand their money to a stock market. They didn’t speculate. They actually went and invested it in something that they had some control over. But we’ll talk about those Five Laws of Gold.
Impressions
There’s one other thing that came up this weekend I want to make a big disclaimer on. I was talking to some friends who had listened to my show, and they got the impression that I’m some rich, big wig, money bags, multi-, multi-, multi-millionaire, that I have a $6 million home or whatever.
And not that I ever said I had a $6 million home—I didn’t—but people got the impression that that was the lifestyle that I was leading and I should be in that based on the way that I talk. And I want to make sure that you understand that that is not the case. I am not a multi-, multi-, multi-millionaire.
Am I a millionaire? Yes. Do I have everything in life that I want and more? Yes. Am I in a better financial position than I ever thought I would be in or ever even had the goal of being in? The answer is yes to all of those questions. But I live in a $175,000 house. Now, I have a big fancy beach house; I have a boat; I have a lot of toys; I drive nice cars and things like that.
Misconceptions
But there is something about houses that people literally judge people—their financial success by their houses. I’ve got to tell you people, you’ve got to watch out. If you’re doing that, that shows a core, foundational misconception that is probably going to destroy your life. And I want to discuss that here right now.
So first off let me just say one more time, if I came across egotistical or like I was some super-rich Donald Trump style, I apologize. I’m not that. I don’t think I will ever be that, nor do I ever really want to.
The assumption is that if you’re wealthy, you’re going to buy one of these big houses. And I think that assumption comes from the misunderstanding—core, foundational, damaging misunderstanding that a home is an asset. Let me say that one more time. The misunderstanding is people think a home is an asset.
Ego Purchases
Now, why do so many wealthy people have big homes? Well, the number one reason is going to be ego—not that there’s anything wrong with that. I’m not putting down that. I have an ego, but my ego is boat and cars, you know. There’s where my money goes. If you want to see frivolous spending, it’s boats and cars Escalades, Porsches, Mercedes, Bajas. That’s where my money goes. But I have to admit that is an ego purchase. It’s a purely fun, ego-based purchase.
Then you have people who their home is their toy and they have a 5,000 square foot home. Do you realize how ridiculous a 5,000 square foot home is? Sorry, for those of you that have them. I just made fun of myself for having Escalades and Land Rovers and all of these cars and trucks, so I’m not just—I will pick on myself too. But think about that. There are people with six, seven, eight bedroom houses—it’s them and two kids. Do you get why that’s just purely ego?
The second reason people do it is because they’ve been lied to and told that a home is an asset. And what financial planners will do because the majority of financial planners are incompetent. Sorry.
Competency
The way you determine whether a financial planner is competent or not is you just ask the question: Is this financial planner retired and wealthy with their investments? Well, you’re going to find that the vast, vast, vast, vast, vast majority of financial planners are not. They’re working. They’re living paycheck to paycheck just like you are and advising you on how to invest your money.
But what they do is as soon as someone gets a raise and they get into a higher tax bracket, they literally tell people, “Hey, I’m your financial planner. Go buy a bigger house so you have a bigger tax deduction.”
So you’ve got the ego on one side wanting to have the bigger house so that you can appear to other people as if you’re doing better than you are, then you’ve got this second group of incompetents giving you an excuse to do it—because you’ll have a bigger tax deduction.
Liabilities
And don’t forget—and here comes the third one—don’t forget your financial planner so incompetently tells you, “Your home’s your biggest asset. So the bigger home you’ve got the bigger asset you got.” People, a home is not an asset; it’s a lia-freakin-bility.
You need a new definition for what an asset is and what a liability is. Assets put money in your pocket every month; liabilities take it. Assets put money into your pocket every month; liabilities take it. What is your home? It takes money every month, doesn’t it?
Now some of you are going, “Yeah, but Steve, I paid my home in full. I got that system beat.” Huh-uh. It still takes money from you. Taxes and insurance don’t stop when you pay off that house, do they?
Statistics
Do you realize people who buy a million dollar house have $30,000 a year in taxes? That’s about $2500 a month still even though the house is paid off. Then you figure your insurance might be around ten grand—or five grand. I’m sorry. I’m thinking of coastal houses. Let’s say it’s five grand. That’s another what, $400 a month. They’re at $3,000 a month even with their home paid off.
So does paying off a home suddenly make it a positive cash flow, suddenly make it an asset? No. And let me give you some statistics to make this very clear and we’ll move on.
The Wall Street Journal did the numbers. They said let’s go buy a home for $200,000 and a rent property for $200,000. If over a 20-year period both of them triple in value—triple in value—your personal residence will have lost you $86,000 after maintenance, upgrades, interest, principal, taxes and insurance. Negative $86,000 even if you bought it for 200 and sold it for 600. You would have still—out-of-pocket—lost $86,424.
If you had bought one rent property for $200,000 on the same day and it had tripled in value over the next 20 years, you would have made $404,000 profit for you and your family. You see the difference between an asset and a liability now?
