In accounts classes, we are taught that Assets and Liabilities are always equal.
But we, middle class, can make any accounting principle look absurd.
Recently, a known brought a Four Wheeler.... A Car. Great. But....
Is it an asset or a liability? In my book, Asset is something which gives you cash flows in the future; while liability is something which eats cash in the future. ( I believe most financial advisers would agree on this). Robert Kiyosaki explains this difference beautifully in his book Rich Dad Poor Dad.
Now, Car will have have running expense, maintenance expense and depreciation.
Petrol is already touching sky and is not expected to come down... Hence running expense will be much higher as compared to a two-wheeler. Same can be said about maintenance. And Resale value of car will go only in one direction with time .... And you already know that direction.
So, in nutshell, car is a liability. Let me know if you disagree.
So, basically, we are purchasing a liability. To make matters worse, the concerned person has taken a loan for purchasing this liability. If you think a bit more, isn't it like taking a liability (loan) for taking another liability (car)? Asset= Liability. Ohh really???? Where is the asset??
What are the possible reasons for buying a liability (car)?
(1) Comfort (2) Social proof {Everyone is having one} (3) Pavlovian misassociation {Car= Status symbol} (4) Envy {big brother of social proof, in this case}.
So, should one never buy comforts? No, one should. But, first, one should add assets. And secondly, not by taking another liability, at least.
Plz share your views on the same.
