Ask:
I was reading the "how much debt do you have?" thread and something struck me. Yes, it's great not to have huge amounts of debt, which is a goal we should all strive for, but it's only half of the equation. That's why I think people should KNOW THEIR NET WORTH. For example, take these two couples, and think about which couple you would rather be.
Couple A: $100,000 Total Debt (Liability)
$75,000 left on mortgage
$15,000 on car loans
$10,000 on credit cards
Couple B: $300,000 Total Debt (Liability)
$275,000 left on mortgage
$15,000 on car loans
$8,000 home equity line of credit
$2,000 on credit cards
Which couple is worse off?
It all depends on the other side of the coin, their assets. While couple A has less debt, they also may not have as many assets. Let's dig a little deeper:
Couple A: Assets
$100,000 estimated market value of home
$15,000 in retirement accounts
$5,000 in savings/checking accounts
$50,000 in other assets
Couple B: Assets
$400,000 estimated market value of home
$100,000 in retirement accounts
$50,000 in mutual funds, stocks, other investments
$10,000 in savings/checking accounts
$40,000 in other assets
Couple A:
Assets $170K - $100K Liabilities = $70,000 NET WORTH
Couple B:
Assets $600K - Liabilities $300K = $300,000 NET WORTH
Now which couple would you rather be? This is obviously a very simplified version of how to calculate net worth, but I just wanted to point out how important it is to know your entire financial picture.
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I think you were the one that described consumer debt v. mortgage debt, too. It just depends on what the debt is. Just because you CAN pay off your mortgage doesn't always make that the best financial decision either.
Good points, Kim!
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Than you for the information. It is a new way for me to luck at things.
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So true, and I always look at the amount of our debt versus the "true picture". Thanks for the reminder.
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That's a really good point! Makes me think of a spin off question.
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Originally Posted by Claire
Just because you CAN pay off your mortgage doesn't always make that the best financial decision either.
SO true. Particularly if you have a low interest rate. If you had an extra $100 each month to save, you'd be better off investing that $100 in a mutual fund that was averaging a 10% return rather than paying off your home, assuming the interest rate on your home was in the "normal" range of 6-7%.
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Originally Posted by Kim
SO true. Particularly if you have a low interest rate. If you had an extra $100 each month to save, you'd be better off investing that $100 in a mutual fund that was averaging a 10% return rather than paying off your home, assuming the interest rate on your home was in the "normal" range of 6-7%.
If I could just convince my BIL. they are making one and a half payment a month on their mortage but are over 50,000 in cc/car debt ( they also just got a motorcycle).
allgirls
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I think it is Dave Ramsey who says that it is when your credit card debt hits $10,000 that you are in big trouble! I agree. If you have debt that you CAN make the payments on that also holds up as an asset, it is not that bad. It is all those little debts on credit cards, loans for vehicles not worth what you still owe on them, etc. that eat you alive AND give you nothing to show for it in the end.
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Originally Posted by allgirls
If I could just convince my BIL. they are making one and a half payment a month on their mortage but are over 50,000 in cc/car debt ( they also just got a motorcycle).
allgirls
This is crazy! Don't they understand how much they're paying in interest on their credit cards??!!
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I really am glad to have this information. I have thought about it on and off all day, and I finally got a chance to do a little work with it. I will focus on this now since I don't have much debt to focus on. I want to build up our retirement fund especially. It's definitely on its way, but I want to really plump that up.