What Is A Cash Absorber?

Managing Your Debt

What Is A Cash Absorber?

17th August 2009

I had an interesting discussion with a friend of mine yesterday about making money, business and the differences between assets and liabilities. This is a bone of contention for Jim and I because we saw things from two different angles and after analysing the topic for a good 3 hours came to the consensus that most of us have it twisted. We then agreed that even upon graduation from college, many Americans still don't have a clear picture of what actually is an asset and what actually is a liability. This is scary considering we graduated over a decade ago and only came to know the real difference just barely two to three years ago.

Managing Your Debt I have always thought that our biggest problem as a nation is that we thrived on debt. Our lifestyles and our ambitions are all built around debt. To achieve our American Dream which is to buy a nice home in the suburbs and drive a nice car and have a car for the wife are all attainable goals, for most of us they were attained through a mortgage loan, car loans, and credit card debt. So at the end of the day we seemingly achieve success by getting into serious debt. However, there is good debt and then there is bad debt. Unfortunately for millions of Americans as our economy has collapsed we have come to realize that our debt was in actual fact bad debt. Our so called "assets" are actually liabilities and are cash absorbers.

So what's a cash absorber? A cash absorber is anything that you might have in your possession that takes cash from your pocket every month and does not return any cash flow into your pocket. A car is a cash absorber, a credit card is another example. If you are paying for anything that you are using that does not generate an income for you, it is a cash absorber. Most people argue that a home is an asset. However, the foreclosure listings and the number of defaults on mortgage loans tell the truth. For as long as you have a mortgage and the house you are living in is not generating any income for you by means of rental, enough to cover your mortgage payment, then guess what? Your home is a cash absorber thus it is on your balance sheet a liability and an asset on the bank's or mortgage lender's balance sheet.

This is a sad reality that shows that we have become accustomed to believing that liabilities are assets. In order to manage our personal debt through these hard economic times, we are going to need to re-educate ourselves financially and understand the realities of how things work.

"Debt, n. An ingenious substitute for the chain and whip of the slavedriver." - Ambrose Bierce, The Devil's Dictionary, 1911

Comments (10):

Quinton Says: The economic downturn has given rise to a new understanding of how things work I believe because most thought their home was an asset till it was foreclosed | 08.17.2009 |

Ralph Says: Interesting, we all made some bad financial mistakes under the pretext of we can afford this not realizing we were investing in liabilities | 08.17.2009 |

Hugh Says: Many of us are fighting to save our homes even though they are currently huge liabilities for us, who wants to lose their home? Not me! | 08.17.2009 |

Tim Says: @Hugh, none of us wants to lose our home and yes though Kev is right, they are liabilities we are still fighting to save our liability | 08.17.2009 |

Natalia Says: I think most people are fighting to save their homes rather than other liabilities | 08.17.2009 |

Pheonix Says: Redifine what an asset or liability is because we've gotten it twisted | 08.17.2009 |

James Says: You are so right Kevin, our lives are built around bad debt and bad credit | 08.17.2009 |

Skipper Says: It was bad credit in the way of the subprime market that gave rise to the economic recession and mess we are in now. Perhaps our bankers themselves need to go back to college! | 08.17.2009 |

Dave Says: The bankers knew exactly what they were doing, it was greed | 08.17.2009 |

Larry Says: This all sounds good and well but the question is how to solve it | 08.17.2009 |

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Managing Your Debt

What Is A Cash Absorber?

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