A Closer Look at Assets and Debt

Now that you have a basic idea of your assets and your debts, or liabilities, take a closer look at the role they play in your long-term financial plans.

Appreciating and depreciating assets
Let's quickly take a closer look at the asset side of this sheet, because not all assets are created equal. If we were to look at your Net Worth statement 5 or 10 years from now, which of your assets would go up in value and which would go down in value? What would a car do? A snowmobile? A camper? A gas grill? A house? A business?

When an asset tends to increase in value, it is an appreciating asset. This is obviously the better thing on which to spend your money! When an asset tends to decrease in value, it is called a depreciating asset. In general, items such a house or a business are appreciating assets; a car is almost always a depreciating asset. Next to each asset on your list write either the letter "A" for appreciating or "D" for depreciating so you know what kinds of assets you have.

Good debt, bad debt
Now let's take a closer look at your debts, because just like assets, not every liability is created equal. On the Debt Tracker Worksheet, list all of your loans, the interest rate, the length (or write "revolving" if it's a credit card), and the monthly payment (leave blank if it's a credit card). This information will help you plan your attack on these loans. Debt can be divided into "good debt" and "bad debt.” Generally, "good debt" is when you borrow money to purchase something that will tend to go up in value, an appreciating asset. Bad debt is generally when you borrow money to purchase something that will go down in value, a deprecating asset.

Taking a loan out to buy a house is usually a good idea, because real estate historically goes up in value over time. Taking a loan out to buy a sofa is not a great idea, because you end up paying more by adding interest costs, and the value begins to go down the first time you sit in it.

Next to each loan, write "good" or "bad" depending on whether it's good debt or bad debt. Now, sometimes it makes sense to have bad debt, so don't take that label too seriously. If you don't have the cash to buy a car, but need a car to get to work, then you need a little bad debt. But, in a perfect world, the majority of your debt would be "good."

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