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Some personal finance gurus such as Robert Kiyosaki claim that people should "buy assets, not liabilities". This made me wonder: is it even possible to buy a liability? From what I have observed, everything I have spent my money on is either an asset or an expense. I am not aware of having bought any liabilities.

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    Kiyosaki is being a bit liberal with the meaning of the word "liability". Commented Aug 17, 2022 at 14:23
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    I think it's the same as the home-spun version "Never invest in anything that eats or rusts".
    – nigel222
    Commented Aug 17, 2022 at 16:33
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    Does this answer your question? Is a house an asset?
    – Hart CO
    Commented Aug 17, 2022 at 18:30
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    To answer the question asked: You buy a "liability" by making up your own definition the for the word "liability."
    – stannius
    Commented Aug 17, 2022 at 21:47
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    I think Kiyosaki is gesturing towards the idea that when buying something you need to consider not only the purchase price but also any ongoing costs of ownership of that item.
    – Jeremy
    Commented Aug 18, 2022 at 5:11

7 Answers 7

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The definitions in the book are:

An asset is something that puts money in your pocket and a liability is something that takes money out of your pocket,

Buying real estate is an example of an asset - you make money off of the rent you charge for living in it. Stocks are usually an asset, as they can go down in value, but in the long run they should appreciate so long as you don't have too much risk in your portfolio.

A car is (usually) a liability - they cost money to operate. However, you get utility from the car if it allows you to get from place to place cheaper than alternatives (like public transit). So by the author's reasoning, you should have as cheap of a car as possible, and not "splurge" on a fancy car, as it costs more than its utility. If you have a car payment, then it's almost certainly a liability.

A boat is definitely a liability, unless you're a commercial fisherman or are able to make money off of having a boat.

So the idea is to invest money in things that make money, not waste money on things that don't. Now certainly we all want to enjoy life and buy things that would be considered "liabilities", but the concept is that the more "assets" you buy versus "liabilities", the wealthier you will be.

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    I think a good example is buying more house than you need for your personal home. A lot of people did this before the 2008 crash. While you might make money later, it creates negative cashflows and prevents you from buying things that produce positive ones.
    – JimmyJames
    Commented Aug 17, 2022 at 17:21
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    "A boat is definitely a liability" if you're going to count the utility you get from a car and compare it to public transportation, why not the entertainment value from owning a boat and compare that to the costs of other types of entertainment?
    – Hart CO
    Commented Aug 17, 2022 at 18:37
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    @HartCO "Entertainment value" does not make you money, hence it is a liability by the author's definition. Don't take my answer (or the book) to mean that you can't have fun (or own a boat), but they are destroyers of wealth for the sake of entertainment.
    – D Stanley
    Commented Aug 17, 2022 at 18:42
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    @HartCO The reason people make this sort of statement as advice is because some people need it... it may seem obvious to you, but a lot of people incorrectly identify the sorts of things they can buy now and sell later as "investments" when these are things that no one should expect to increase in value. People do, in fact, see extra money in their account (possibly for the first time in their life) and buy a car thinking that any cost is justified because they're getting something they can sell later. Commented Aug 17, 2022 at 19:39
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    @HartCO if you need the car to go to work, then it absolutely does make you money Commented Aug 18, 2022 at 7:32
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In this sense, a liability is something that would cost you additional money to continue to own, or otherwise hinder your financial position.

To quote Kiyosaki directly (and explicitly explain this particular usage of the word "liability"):

An asset is something that puts money in your pocket. A liability is something that takes money out.

A classic example is a shiny new car. You may pay tens of thousands of dollars for a new car, and arguably it is in fact worth that much, but as soon as you drive away with it, it becomes a used ("pre-owned") car, and is worth significantly less.

If you use debt (a loan) to purchase such a vehicle, you can easily end up in the position where the sale value of the car is less than what you owe on the loan, and it will actually cost you money to sell it (you get some money from the sale, but not enough to pay the loan, and need to come up with additional money to settle the debt).

Aside from the underwater sale scenario, keeping the car will cost you money. You need to pay for fuel, maintenance, insurance (which will be more expensive than for an older vehicle), and possibly recurring tax (based on jurisdiction; also likely more expensive for newer cars than older). Additionally, if you use a loan to purchase it, you will have to pay interest on the loan.

For another popular example, see boats ("the two happiest days in a boat owners life are the day he buys it and the day he sells it").

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    "A boat is a hole in the water you pour money into."
    – Jon Custer
    Commented Aug 17, 2022 at 16:29
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    Another example would be a building you buy for £100,000 but there are repairs costing £250,000 needing done to make it comply with local regulations.
    – deep64blue
    Commented Aug 17, 2022 at 16:51
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    @deep64blue well, it would depend what the building is worth after the repairs. Repaired building value £400,000, result happiness. Repaired building value £300,000, result misery.
    – stannius
    Commented Aug 17, 2022 at 18:30
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    @HartCO it's not a liability in the accounting sense, but in the plain language sense ("a person or thing whose presence or behavior is likely to [..] put one at a disadvantage.").
    – yoozer8
    Commented Aug 17, 2022 at 20:29
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    @stannius Why would it be misery to buy a house for £100k, invest £250k, if it's then worth £300k? I may happily live in it for the next 30 years, and maybe the house I wanted for £300k did not exist. Consider the £50k the customisation premium, which is not bad if I live in it for 30 years. It's only a misery you see a house purely as an investment, rather than as a home.
    – gerrit
    Commented Aug 18, 2022 at 9:27
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In his book Rich Dad , Poor Dad Author Robert Kiyosaki mentions to "Buy Assets not liabilities". Asset means something that appreciates in value over time and Liability means something that depreciates in value over time.

To make it more clear, lets take an example of iPhone.

The latest version of iPhone , iPhone 13 Max Pro was launch on Sept 17 2021 with launch price of $1099 for 128 GB variant pre-taxes in US. The value of that same device is much lower than the price it was purchased on. It can be considered as an Liability. Price of same device is $974.99. (Source :- Used iPhone 13 Pro Max)

On the same day, the price of Apple Stock , the company which sells iPhone amongst other products was $146.06 (Split/Bonus adjusted) and as of writing this article its trading at $173.19 with and additional payout of $0.90 per share in form of dividends (Dividend amounts not split adjusted. Source :- Apple Dividend History). The value of same share has increased approximately 18% excluding dividends. So, this stock/share can be considered as an Asset as it is increasing in value over long run.

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    I think the idea of the idiom is that a depreciating asset is a liability
    – ymbirtt
    Commented Aug 17, 2022 at 11:53
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    @Flux it should be taken as exactly what ymbirtt said: an idiom, not something strictly defined according to the laws of economics Commented Aug 17, 2022 at 15:16
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    Maybe a car would be a better example? Not only does it depreciate in value, it also requires constant expenses to keep operational.
    – jaskij
    Commented Aug 17, 2022 at 15:48
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    A rather extreme example was a en.m.wikipedia.org/wiki/White_elephant .
    – eps
    Commented Aug 17, 2022 at 16:30
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    Basically, Kiyosaki is trying to sell an alternate definition of 'asset' that is at odds with long-held widely accepted definitions. It doesn't matter if an asset depreciates, it is still an asset.
    – Hart CO
    Commented Aug 17, 2022 at 18:35
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Kiyosaki changes meanings, to educate.

Yes, Kiyosaki does not use the standard emotional or accounting terms for things. But that is quite on purpose and for the sake of making a point.

For instance, the Navy probably scores it like this:

Asset: Superyacht, SS More Money Than You.
Liability: $100 million bank note on Yacht

Asset: Sprawling apartment complex in Docklands London.
Liability: $100 million bank note on apartments

In the accounting sense, these are the same situation twice. But of course they are not. The yacht is a total loss, no matter how hard you AirBnB that thing, all the hustle in the world will not pay its note and upkeep. But the apartment estate earns more than enough to pay its bank note and maintenance. Kiyosaki's meaning very much takes that into account.

And Kiyosaki's goal is to make you think about that. For everything.

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One aspect not yet fully addressed is that in the short term and medium term, houses cost money. Ongoing monthly mortgage payments are most families single largest expense. Over a 30 year period, the economy will likely undergo a few recessions and likely a depression. It's common for people to lose jobs and houses to lose significant value during the downtimes. Paying the mortgage can then become very difficult. The monthly cost of owning the house then becomes a significant burden.

My solution- buy a house leaving significant extra in my budget to pay ahead. Also, ask the lender to include a clause that if I pay ahead I can also waive future payments.

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An asset is something that produces value. However, Kiyosaki says

An asset is something that puts money in your pocket and a liability is something that takes money out of your pocket,

This is a rather narrow definition of "asset", as it counts only direct monetary value ("puts money in your pocket"), and disregards less tangible value. According to the principle of revealed preference, if someone buys something, then it gives them value, or at least anticipated value, according to how they have defined value. Saying it doesn't is imposing your own definition of value on them.

Of course, someone can be mistaken as to how much value something will give them. So according to the general definition, one can purchase a net liability by paying more for something than the enjoyment they get out of it, and according to Kiyosaki's definition, they can buy a liability by buying anything whose price is based on personal enjoyment, rather than financial return. So mostly, this is just an obfuscated way of saying "Spend money only on financial investment, and not on anything that improves your quality of life". Which, if your primary goal is to get rich, is I suppose reasonable advice, but as far as actually being happy, is rather problematic.

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When someone says "buy assets, not liabilities," they are typically referring to making wise financial decisions. In this context, an asset is something that provides value or generates income (Appreciates in Value), while a liability is something that costs money or creates a financial burden (Depreciates in Value).

It's not possible to literally buy a liability, as a liability is not a tangible item that can be purchased. However, people can take on liabilities by making poor financial decisions, such as taking out loans they cannot afford or buying items on credit that they cannot pay back.

For example, if someone purchases a car on credit, they are taking on a liability in the form of the car loan. The car itself may be an asset if it is used to generate income or provides value, such as using it for a ride-sharing service. However, if the car is not being used in a way that generates income or value, the loan is simply a liability that costs money in the form of interest payments.

More importantly, a car's value tends to depreciate over time. See the Used Car Price Trends by Carguru.

Another example of buying liability is smartphones. Similar to cars, phone value depreciates over time. See Used iPhone Price by UpTrade. It's surprising to see how fast the value of a used iPhone drops.

An opposite example is buying houses. Buying a house can be considered buying an asset. Here are a few reasons why:

  1. Potential for Appreciation: Generally, real estate property values tend to appreciate over time, which means that the house you buy today could be worth more in the future. This is not guaranteed, but it is a possibility that can make owning a home a good investment.

  2. Rental Income: If you decide to rent out your property, your house can generate rental income, which can provide a steady stream of passive income.

  3. Equity: When you buy a house, you are building equity. Equity is the difference between the value of your home and the amount you owe on your mortgage. As you pay down your mortgage, you increase your equity in the home.

  4. Tax Benefits: There are tax benefits associated with owning a home. For example, you can deduct mortgage interest and property taxes from your taxable income.

See U.S. House Pricing Trends by Redfin.

Therefore, the advice to "buy assets, not liabilities" is a reminder to make smart financial decisions that will increase your net worth and help you achieve your financial goals.

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