Question

In: Finance

Identify and analyze your debts. What assets secure your debts? What assets do your debts finance?...

Identify and analyze your debts. What assets secure your debts? What assets do your debts finance? What is the cost of your debts? What determined those costs? What risks do you undertake by being in debt? How can being in debt help you build wealth?

Solutions

Expert Solution

Presently, I have the following debt

Debt Type Debt outstanding Interest rate Tenure (years)
Student loan $40,000 4.50% 10
Car loan $20,000 4.00% 5

The assets which secure the debts are the car for the car loan and my car which is currently valued at ~ $20,000. For the student loan, the collateral is guarantee provided by my father against his net worth.

The assets financed by dent are the car and my college education. The cost of the debts are determined by the tenure of the debt and also the collateral which is available to secure the debt.

The risks that I undertake by being in debt are:-

  • Not able to save enough to meet my financial goals
  • Large amount paid to repay the debt and consequently being forced to work in a job not liked by me but necessary to repay the loan

Being in debt is counterproductive for the creation of wealth as this works as negative compounding with the bank earning interest at our expense instead of us investing and earning interest.


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