Great statement, Jacob
“To gain financial independence very fast one needs to think really hard about reducing liabilities”
Several years ago, when I sensed this, I began paying off our car loans and mortgage. Family & friends just could not understand this
nor the freedom I felt in the process.

That reminds me of when I lost my sunglasses (like 15 years ago!). I could have just bought new ones, but I thought, “Let’s wait until I earn enough money to pay for them.” So I waited like 2 weeks until I got paid.

The interesting thing is that the process of buying them was incredibly rewarding. I felt like I actually worked for them and that I deserved them. It was a great feeling.

By the way, I did not lose the new ones. I still wear those sunglasses every day.

The last question “Is this really living?”, is an important one.
For me, it sounds more like living than the ‘normal’ life I’ve lived for the past 25 years.
I’m moving fast to ‘your’ life and what I experience up to now in the changes I already made certainly feels a lot more alive than what I used to know.
I think it depends on one’s personality, but for me the answer is a clear YES.
You have known both sides Jacob, it would be nice to hear if there’s anything in the normal life that you miss in your early retirement life.

The technique of offset is interesting! I used to reward myself for accomplishments. You are doing the same thing, but rewarding yourself for removing a negative thing. I think the result is the same! If it works, why not.

@milos – Only from a balance sheet perspective. From a cash flow perspective, houses and cars are net negatives.

@milos – It is true that rental houses can have a positive cashflow, but only if the rent is more than enough to cover all liabilities (any mortgage, property taxes, maintenance, void periods).

A person’s main residence is pretty much invariably cashflow negative and is a liability. (I have one friend who rents out so many rooms in her house that it is cashflow positive on a month to month basis, but she has had to get some expensive alterations done to it so factoring those in it is still a liability.)

Your main residence could become an asset when you move elsewhere and sell it, but that is a different issue.

Similarly, very few cars are assets, unless you are a skilled mechanic and know a lot about classic cars. Even then, all the running costs probably still make them liabilities, just smaller ones than for most people.

@milos – Jacob is channeling Kiyosaki and Lechter’s book, “Rich Dad Poor Dad” in this old blog post. The single important piece of information I got from the book.

Kiyosaki et al defined an asset as something that generates income. Everything else is defined as a liability.

So yes, if you have a house and roomates/renters bring in more money that it costs to maintain, then yes, the house would be considered an asset. (Whether the money used to purchase the house could be better invested elsewhere is another argument.)

However, a house that you purchase solely to live in would be a liability. Not only because of the taxes and maintenance costs, but also because of the opportunity cost.

That said, you need to live somewhere. The goal of ERE is to reduce liabilities to the minimum required for happy existence and gain enough assets to fund those liabilities without requiring gainful employment to supplement.

@milos – I’m changing the definition [back so to speak] because it is not useful to think of houses and cars as assets unless you run a hotel or a delivery service. If you want to get wealthy it is much better to think of assets as money generating capital assets. When you buy a house or a car, sure you get an asset. You also get a loan which becomes your liability but the bank’s asset. Now you gotta ask yourself why the bank would rather have a debt-asset than a house or a car-asset? Because a debt-asset generates a steady stream of money. A house-asset requires management and work.

It’s fine if you want to stick to the standard definition, but consider how definitions usually constrain one’s thinking. As it is now, people maybe have a $1M house (asset) and a $600k mortgage and think they’re pretty well-off because their “equity” is $600k. But they’re not. Their return on equity is NEGATIVE. Their cashflow is NEGATIVE. In other words, they’re sitting on an asset they should get rid of if they want to get wealthy. It’s a really crappy asset. It’s a liability to their wealth. It is highly likely that the only reason they still have and that this house-asset still exist is that they support it with lots of other income (e.g. their job).

The house-asset will only attain value when a greater fool comes along and buys it. But then the seller no longer has a place to live. The only way to make money with house-assets is to leverage them by five to infinite and then pray for the greater fool theory to work.

Calling it an asset instills a false sense of wealth/confidence is those who don’t know any better, that is, most.