News

Think net, not debt

Western Bureau:

WHEN WE CONSIDER how much financial progress we have made in our lives - and there are those who would have us believe that this is the only progress that counts - there is a tendency to count what we have acquired.

Totting up the value of the car, the house, the computer, and the home theatre system and saying, 'gee, how far I have come' is not the way to go. This may cover the value - or, to be more accurate, the price - of what you have acquired, but it certainly does not cover your personal worth.

You see, it does not cover your debt.

For example, it sounds nice to say "I have a car worth $1.5 million". However, if you are still making payments, unfortunately what it means is that you owe whatever the remaining balance is. In addition, as a car is a depreciating asset, affected not only by wear and tear, but also by the emergence of newer models, the value goes down very quickly.

It would be wise, therefore, to get a valuation on the car in its present state and at current market conditions, before chalking it up in the plus column.

The same applies to the apartment or house you live in, that is, if you own it or are in the process of paying for it. If you own it outright, then all the better; if you are paying a mortgage, checking the remaining life on the loan, plus the current value of the property, is a very good idea.

It is heartening to know, though, that a house is an appreciating asset - unless it is somewhere like Caribbean Terrace, that is.

And so it goes, working out hire-purchase payments, credit card debt, the money left to be paid on the student loan, balancing these against what you own outright. The objective is to arrive at your true 'net worth' - and debt is not a part of the net worth.

For, despite what the ads with dancing and glowing people seemingly bursting with happiness say or suggest, debt is not an asset.