Wednesday, March 26, 2008


One of the reasons people get into financial problems is because they don’t understand how items depreciate. Most items are worth less over time. For example, if you bought a car in 2001, it is probably worth less than what you originally paid for it. This is depreciation. The value of your property depreciates over time. That computer you spent $1000 on in 1999 is probably worth about $10 today.

People get in trouble with debt when they borrow money for items that depreciate rapidly. For example if you buy a stereo today for $1000 using credit, once the stereo is no longer new it is worth less than what you owe. You couldn’t take the stereo out and sell it for the amount you owe on it. If an individual buys many things like this it is easy for their net worth to become negative very quickly.

On the other hand, certain types of items retain their value. For example, if you bought a house 5 years ago, it is probably worth more today that what you paid for it. If you have a traditional mortgage, you now owe less on the house that what you could sell it for.

In general if you have to take out a loan, you should only use borrowed money for items that don’t lose their value. It is better to borrow money for your house than for your automobile because the house will retain its value much longer than the automobile.

No comments: