Article Side

Online Article Directory!

Hello Guest! Login or Register to submit articles!

How Do You Distinguish Good Assets from Bad Assets?

By Keith Wheelan Subscribe to RSS | May 17th 2012 | Views:
loading
 
  



At the height of the 1980s real estate bubble I watched a TV news interview with a new homeowner. She said her parents always told her: “Buy the biggest house you can afford.” And that’s exactly what she did. She was beaming. It did seem to make sense, at least at the time. After all, homes were appreciating (increasing in value) on average over 5% per year in the 1980s and over 10% per year the previous decade.

I, too, found the advice compelling so I followed it and bought a house much larger than our family needed.

Shortly afterwards my wife and I saw the movie “The Money Pit.” I can’t say the movie was Oscar-worthy, but its central message did resonate: Sure, a home can be a large and often appreciating asset, but the bigger the home the bigger the mortgage. And the bigger the mortgage, the bigger the monthly expense. Nice that it appreciates, but not nice that it creates a negative cash flow.

We found that by committing all of our available income to paying the mortgage and other expenses associated with the home - by creating such a large negative cash flow - we were losing the opportunity to pay off other debts, or to use some of our income for better investments. In other words, being “house poor” was keeping us from moving ahead financially.

After a few years in our McMansion we realized our (my) mistake and downsized.

The above example illustrates that when evaluating any asset there are two considerations: 1) Does it appreciate or depreciate? And 2) Does it generate a positive or a negative cash flow? The problem with the advice to buy a large primary residence is that this type of asset only passes the first test (appreciation). It doesn’t pass the cash flow test.

By evaluating any asset on two dimensions - appreciation vs.

depreciation, and positive vs. negative cash flow - the asset can be

classified as either “Best,” “ 2nd Best,” or “Worst.”

So by evaluating an asset based on two dimensions - not just whether it appreciates or depreciates, but also whether it generates positive or negative cash flow - the asset can be grouped into one of three categories:

1) Assets that BOTH appreciate AND generate positive cash flow (Best)

2) Assets the EITHER appreciate OR generate positive cash flow (2nd Best)

3) Assets the NEITHER appreciate NOR generate positive cash flow (Worst)

A primary residence, then, falls into the “2nd Best” asset category. If it’s a 1-family primary residence, that is. What if, on the other hand, it’s a multi-family rental property? In that case the asset has the potential to appreciate and also generate a positive cash flow (if the monthly rental income is greater than the monthly mortgage, insurance, property tax and maintenance expenses). So a rental property is an example of a “Best” asset type.

How about the bad kind - “Worst” assets? Examples of these include cars, boats, furniture and household goods. They lose value and they don’t generate positive cash flow.

You can find more information about the three Asset types and strategies to help optimize your asset and cash flow mix in our free e-booklet “Wealth Is Good, Cash Flow Is Better”. In the meantime, we invite you to share your thoughts - and your own stories and experiences - on this subject with other readers.

Keith Wheelan - About Author:
Keith Whelan is Cash Flow Navigator’s founder, resident financial expert, and author of the “Wealth is Good, Cash Flow is Better” e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife Cindy, and their two sons live in New Jersey.

Share on Facebook Tweet It Stumbleupon this post This post is delicious !

Article Source:
http://www.articleside.com/finance-articles/how-do-you-distinguish-good-assets-from-bad-assets.htm

Related Finance Articles Subscribe to RSS

Another financial storm to hit the Britain
Published by Look Right on January 25th 2012 | Finance
Another recession is approaching the UK economy, as a newly constituted finance watchdog has reveale...
 
It is very hard to tell the worth of financial advice
Published by Ross Sorin on March 13th 2012 | Finance
People even in today’s fast times do not know the important of financial advice. The financial adv...
 
Could buying a motor from Used Car Dealers Blackpool make financial sense for you?
Published by Mary Porter on June 19th 2012 | Finance
Most drivers know that when buying a car, getting a brand new vehicle is often unnecessary and that ...
 
Short Term Loans: Fills the gap during financial crisis
Published by Annisa Nelson on June 5th 2012 | Finance
A short term loan manages your sudden expenses and pays out short term monetary urgencies....
 
Bad Credit Secured Loan: Huge financial support in spite of bad credit
Published by Ian Foster on February 2nd 2012 | Finance
Bad credit secured loan has introduce by the economics establishment to continue the people whose cr...
 
Know the importance of the different financial forms
Published by Fiona James on April 27th 2012 | Finance
It is very important to have financial forms in order to complete any type of financial business smo...
 
Great hope for the people with poor financial status
Published by Alice Johnsonn on January 3rd 2012 | Finance
Personal loans no credit check are the best way to access fast cash without undergoing any credit ch...
 
Major reforms in UK financial regulation: Draft Bill and White paper produced
Published by Becky on March 15th 2012 | Finance
The most significant modification in a decade to the UK’s financial regulatory architecture began ...
 
Do you need assistance with financial debt that has been around for decades?
Published by Deby Suportie on February 16th 2012 | Finance
Debts can often be difficult to manage especially when it has been around for quite a while already....
 
 
Loans for UK People: an easy financial solution
Published by Simuels Jack on June 11th 2012 | Finance
Loans for UK people are very helpful in times of need for monetary assistance. According to one’s ...
 
Missouri, a State with a sense of personal safety
Published by Insurance Inde on January 18th 2012 | Finance
Missouri State has some of the drivers who have a high sense of personal safety on the roads in the ...
 
Payday Text Loans UK- Mobile phones give financial amounts!
Published by Cameron White on December 8th 2011 | Finance
Payday text loans UK is best way to overcome small fiscal hardships and it’s not difficult to get ...
 
Right Process of financial Planning and need of getting a Financial Planner Sydney
Published by Avena Sowell on December 8th 2011 | Finance
Process of financial planning involves high level of knowledge and skills as financial markets keep ...
 
Loans for Unemployed: Lessens your financial troubles!
Published by Matthew Anderson on June 7th 2012 | Finance
Situations may become worse for unemployed people but loans for unemployed turn the situations bette...
 
Independent financial adviser – Propel your earnings
Published by John Kendal on March 31st 2012 | Finance
A financial adviser covers very important issues like wealth management and advises the clients in g...
 
 
Free Credit Score: right choice to understand your financial status
Published by Anthony Brian on May 15th 2012 | Finance
Every customer is granted one free credit score report from principal agencies each and every year, ...
 
Loans for Unemployed: a financial contribution to jobless!
Published by Jim Kerry on June 5th 2012 | Finance
Cash loans for unemployed help the disappointed jobless people for pulling out of this financial cri...
 
Good financial planning can give you a good future
Published by Pramod Kumar Singh on May 23rd 2012 | Finance
Start planning your finances today to have a safe and secure present as well as a bright future that...