Thursday, September 6, 2012

How debt influence net worth?

Some people think owe money can increase the net worth. Let Says, Mr Broderick has $ 10,000 in the certified deposit. He wants to increase the asset by owe $ 10,000 from the bank. Mr. Broderick asset look increase. He has $ 10,000 in deposit and he has $ 10,000 in suitcase. Mr. Broderick want to buy the store at the certain city to wide the market.
Mr. Broderick net worth is not increase per se. After get loan from Bank the netw worth is become zero. He has deposit $ 10,000 asset, but he has bank loan $10,000 liability.
The Bank also charge interest rate 5% years so Mr. B will pay $ 10,050 next year. Next ten years Mr. B net worth will be below zero. The liability $10,050 minus $ 10,000 equals $ 50. If Mr. B cannot get the cash from his new store, he must be bankrupt. If, on the other hand, the new store sales so many product, the asset may increase. Let say, Mr. B can make money $ 11,000 from the new stores. His networth wil increase to $ 11,000 assets minus $10,050 loan equals to $ 950.
Not all debt decreases the net worth. For a moment, debt must decrease the net worth. If we can use the debt, the net worth could increase. Before propose the loan, a businessman should make sure that the debt can be useful for business.
Borrowing money for buy a luxorious car must decrease your net worth. You cannot generate financial benefit from luxorious car. The interest rate of lease car is high and the value decreases every year.
In my opinion, the debt is difficult to lift our net worth. The interest of the debt is high so you will difficult to pay it.
Borrowing to userer or mafia is a fast ways to bankrupt. They can provide the cash quickly without guarantee but they will find you wherever you go. They are not shame to charge the high interest to the borrower.
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