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An asset is something tangible that we find value in. To understand how we can keep our assets and make it grow, let us first differentiate the different kinds.
Kinds of assets
The first kind of asset is the appreciating asset. These assets have values that either appreciate or are maintained over time. Unlike other assets like clothes and stocks of food, assets like luxury cars have values that appreciate over time.
The second type of asset is plain personal property. Personal property includes all the stuff that you store in your house, including clothes, ordinary cars and furniture.
Here's the thing about assets: most assets have depreciating values. For instance, a brand new car in a show room has a different value from a brand new car that was just driven ten kilometers by its new owner. In some instances, the value of such an asset is immediately halved due to plain use.
Assets are also part of one's over all “financial identity”. Assets are also evaluated once you apply for a loan, or a mortgage for a new home.
Debt-to-income ratio
How do lenders evaluate applicants? One simple way to judge whether a person can pay his or her loans is by looking at a person's debt-to-income ratio. If the debt supersedes the gross income, the person is considered unfit for another loan.
According to Rudy Cavazos, the director of corporate and media relations for the Money Management International:
"Maintaining a good debt-to-income ratio will keep vital financial doors open. Owning a home and a car is just the beginning. A home requires improvements, and cars must be replaced."
Computing debt-to-income ratio
Can't wait for a financial advisor to compute your current debt-to-income ratio? No need to call someone to your aid. You can compute it from the comfort of your office or home.
First, compute your gross monthly income. This includes everything from monthly salaries to bonuses to income from second jobs. Proceed to compute the total amount of money you have to expend for debt obligations.
Now, divide the total debt obligations by the first figure, which is your gross income. The resulting decimal notation would be the percentage of your debt-to-income ratio.
According to statistics, more than 8% of American homes have negative net worth. This simply means that these families have more debt to pay than money coming in. This spells trouble, because even fixed interest rates can bury a family in debt for a long time.
Avoid the trap
According to Wendy Liebmann, president of WSL in the United States:
"The role of shopping in American life has changed dramatically since 1990. No longer is shopping solely about practicalities alone. Today, shopping is about who we are, how we live. Shopping is life."
Wealth creation is about informed choices- to create wealth, one must save, acquire appreciating assets and avoid the shopping-crazy culture of the US.