Bob O'Brien
Head Instructor
bobrien@mywealth.com
With meetings in Washington tomorrow in regards to repealing the “Mark to Market” rules for accounting, I wanted to ask our readers a question: Is your home an asset? Do you count it as an asset on your own net worth (personal balance sheet)? Should you?
The answer is not as simple as some might think. In fact there are many that think it is a liability. Robert Kiyosaki, the author of the “Rich Dad, Poor Dad” books is well known for saying that your home is not an asset, because it does not produce any positive cash flow for you.
His philosophy is that in order for something to be an asset it must produce income. A personal residence just creates a negative cash flow and therefore is a liability. Only things that produce income should be viewed as assets.
The contrarian view to this is that is that it is not a liability since home ownership does not put you at a disadvantage and therefore it is an asset. Check out this article!
This debate is no different than the hearing in Washington tomorrow in regards to the “mark to market” accounting rules. It is subjective as to how you want to value assets and/or liabilities.
This is also no different than the attitude of any great competitor that is serious about meeting their goals. When Tiger Woods is on the final holes of a tournament and he and his competitor are tied, he assumes that his competitor is going to play great golf and sink all the big puts! Mariano Rivera the great closer from the NY Yankees assumes every night that he is going to have to hold a one run lead in the ninth inning.
This attitude makes people that are serious about meeting their goals much more engaged and therefore much more likely of achieving them.
If you are serious about building wealth and meeting your financial goals, you will not count your home is an asset, regardless of any accounting argument. When you don’t rely on your home as an asset, it motivates you to make certain that you are saving and staying completely engaged with your finances and investment portfolio. Open up a practice account in order stay more engaged with your finances.
Make certain that you follow this “mark to market” story tomorrow and watch the effect it has in the markets. If the “mark to market” rules of accounting are changed, and we go to a more liberal accounting standard this will have a positive effect on stocks and negative effect on the US Dollar.
Why? Simply put the easing of mark to market will help the banks capital structure and therefore make them worth more money. This will create a stock market rally and motivate people to leave the US Dollar because they no longer feel that they need a safe haven.
Mark to market is simply a means by which you can calculate the value of something based on the current market value and not the “book value” that can be much more subjective. The “market value” is objective to all at any given time.
The market value for all these bad mortgages is next to nothing right now because nobody wants them. There is no “market” for them and they are being valued based on the “market”. This is an issue that is at the heart of the financial crisis.
Accounting firms have been forced to value assets for companies using “mark to market” since the accounting scandals of 2001-02. This has caused a certain degree of controversy, because it has forced banks to mark themselves down on their own balance sheets and therefore require more capital.
Banks are always forced to have a certain degree of capital in reserves, which is based on assets. These markdowns reduce the value of bank regulatory capital, requiring additional capital which has been one of the major causes for the current credit crunch! For further reading on this topic please refer to this link: “Mark to Market”
Financial education is more important than ever and nobody will ever care more about your finances than you! Get enrolled in one of our courses immediately!
Sincerely,
Bob O’Brien
Sr. Instructor
