As I look around at my peers and friends maturing throughout their twenties, I find that many of them are unable to correctly distinguish between and asset and liability. Some of my buddies are accumulating liabilities at an alarming rate, all the while thinking that these things are assets, and these things will “pay off in the long run.” Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free In this article, I want to describe some of the most common “assets” that many of my peers are accumulating, and the devastating financial impact that these assets can have on the personal balance sheet. Granted, some folks are quite content to sacrifice their balance sheets for the comforts and luxuries I list below, and 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 Cashflowing “Assets” That Devastate 20-Somethings’ Finances “Asset” #1: A Financed Car I myself am guilty of this one. Even an "economy car" like my 2014 Toyota Corolla is a huge financial hit when financed new. My payments will continue for years, and I'm leveraged against a depreciating asset (meaning that I took out a loan to pay for the car, when there is a 100 percent chance that it will decrease in value over the duration of the loan) â a surefire way to compound losses over time. In my case, I attempted to sell my vehicle earlier this year, but 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’ll never get a great deal from a dealer. This has been 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!”), which 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. Related: Is Financial Failure Due to Lack of Motivation? Why Money Issues Run Rampant “Asset” #2: A Financed House There are three ways to design your living situation, each better than the last — you can rent, you can buy a nice single family home, or you can house-hack. Renting is by far the worst financial decision in most markets. Every dollar you spend on rent is a 100% loss that you will never see again. It is imperative to move away from the status of “tenant” as soon as possible. Anyone who’s read Rich Dad Poor Dad understands that a primary residence occupied solely by one’s family is not an asset. It is a liability with negative cash-flow. All else being equal, homeownership is usually superior to renting, but a huge portion of the monthly upkeep still leaves your pocket. We on BiggerPockets understand the difference between an asset and a liability and seek the clearly superior solution of owning a small multifamily property, living in one unit, and renting out the remaining units. Intelligently buying a small multifamily properties and renting out the remaining units can provide enough cash-flow to pay down the mortgage and cover the operating costs of the property, enabling you to cover the largest single expense in most American lives — housing. Asset #3: A Financed Degree Education is great. We’ve all seen the studies about how much more money people make over the course of their careers when they go to college, grad school, or become doctors and lawyers. I’m not here to argue with that. It is absolutely true that over the course of a 40 year career, you will likely earn way more money with higher education. But only if you have a 40 year career. And only if your goal in life is to actively earn a lot of money. Investors, like those of us on BiggerPockets, are well served to be wary of business school, law school, medical school, or similarly expensive educations. In most cases, this schooling can significantly delay one’s ability to accumulate net worth and the corresponding passive income that increases opportunity and frees up your time. There are two main reasons why folks that are pursuing financial freedom might want to watch out for education beyond a value-centric college degree: Reason #1: The Financials of the Education Grad school is expensive and average debt load is roughly $57,600 for MBAs, though this will vary depending on your degree and university. On top of that, you miss out on the potential income you could have earned and invested while studying and spending at graduate school. If your goal is to become financially free, or take control of the finances of your own life, this will set you back. Reason #2: The Mentality of the Education Suppose that you are pretty smart and go to Stanford or Harvard for business school. Two years later you emerge with a degree from one of the finest institutions of business learning in the world, and ask yourself, “What do I want to do with my life?” Well, because you have a $200,000 degree from an elite school, guess what? Every single option you had in life prior to starting business school now makes less sense except one: Working a high paying job with long hours at a large corporation. You are now backed into a mental corner. Are you now free to work at a surf shop, take six months and backpack around Thailand, or even invest in low-end real estate? Of course not. You’ve got an MBA from Harvard! The MBA you are pursuing eliminates quite a few good options from your toolkit and replaces them with a small minority of dull jobs where you sacrifice the best part of your day for a hefty salary and bonus — most of which are used to pay down the financing on that very same education. Bonus “Asset”: The Cash-Flow Negative Spouse You’ll know this one when you see it. This is the husband who is too lazy to get a job and hits up the bar every night, or the stay-at-home mom who spends thousands on designer clothes and jewelry and expects a fancy dinner out at a nice restaurant every week. Finance is both an offensive and defensive sport. It is imperative that both partners contribute to the family’s bottom line either by contributing income or enforcing a budget and financial discipline. A lack of alignment can result in devastating consequences that not only leave couples in dire financial straits, but also ruin relationships. This is probably the most important “asset” to avoid in ensuring your long-term financial and mental well being. If you’ve got a spouse who is committed to helping the family achieve its long term goals, then avoiding the other “assets” on this list becomes much more achievable. Related: Using Real Estate to Escape the “9 to 5? and Find True Freedom Conclusion Are you accumulating assets or liabilities in your life? Everyone makes mistakes, as I did when I bought my brand new car fresh out of the dealership. It’s all about mitigating those mistakes, learning from them, and applying future capital to the things that will truly improve your life over the long run. Those are real assets. I don’t need a car, a house on a hill, or a fancy degree. I can get around quickly, healthily, and for free on my bike, live for free in my duplex, and learn and network for free here on BiggerPockets. I consider those to be my assets. [We are republishing this article to help out our newer members. Weigh in with a comment!] Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s new book Set for Life, slated for release April 23, 2017,and can be preordered on Amazon, Barnes & Noble and other fine booksellers! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom. What liabilities do you see people incorrectly viewing as “assets”? What would you add to my list? Leave me a comment — and let’s discuss!