OK - enough of the chit chat. It's time to talk about some cold, hard, assets, baby! That's right. We all love em - but few understand em. I decided to include Liabilities and Equity (Equi wha?) in this little round table discussion of ours, because let's face it - very few assets in life are EVER acquired without liabilities and equity attached. I'm thinkin the BEST way to explain Assets, Liabilities, and Equity would be to give a little example - something we're ALL really familiar with; buying a high-powered sniper rifle for those weekends when 4-wheeling just doesn't cut it. Oh, YA baby!
Let's say that you have your eye on this thing, and it's only $10,000. Problem? Not really, except you don't HAVE $10k and The Mrs. isn't about to let you cash in the 401k (more on those later). In all your brilliance you decide that Bob (the banker) would be sympathetic to your plight. You decide to approach him in all your humility and plead your case - because out of all people, Bob would understand. Bob IS sympathetic, but not to the tune of $10,000 sympathetic - more like $7,500 sympathetic. All is LOST! Oh, the humanity! You don't want to settle for that other "piece" the store has behind the counter - you want the one with the 4 ft. scope, and the cool tripod on the front. Just at the very moment when you're about to consign yourself to the trenches of misery (filled with guys who can't buy cool stuff), you realize that you saved 10% of your income ever since you were a child - and your savings Shoooould be right around $2,500 by now. Success! You're mom always told you to save - and NOW it's paying off! She's Brilliant! You TAKE the $7,500 unsecured, high interest rate loan from Bob (more on those later) and run home. You combine the two sacks of money (your $2,500 and the banks $7,500) and head off to the store. As you return home, you now have an aire of confidence, like a king entering his royal palace - for not many men in the kingdom can plink "stuff" from a mile away. Life never tasted SO good.
OK - let's take a look at where your finances are. You just bought a gun that cost $10,000 - THIS is your Asset. What's your liability? Why, the $7,500 of course. You still OWE that to the bank - that's pretty much the definition of a Liability - You're still LIABLE for it. So, now that we've established our Asset and Liability, what's our Equity? That's EASY, it's just the $2,500 we put down on the gun. Now let's say we find it in our heart to pay the bank back a little (because we're cool like that and we would NEVER want America to end up in a big huge recession) so we cut the bank a check for $500. Now we only owe $7,000 and our equity in the gun goes up to $3,000. The asset still stays at $10,000 - because that's what we bought it for.
Pretty Easy? I thought so. Now - go get that gun! Just invite me along when you start plinkin stuff.
Tuesday, June 2, 2009
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I think I understood 1/2 of that. You might have to dumb it down even more for readers like me.
ReplyDeleteI second that - LOL ;)
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteI'll be honest, I didn't really have a handle on what equity is until now. Thanks!
ReplyDeleteNow, quick question: let's say you get $7,000 by winning the half-court basket challenge during halftime at a basketball game (which, by the way, is now America's most dependable source of income). So, you use that money to pay off the rest of your loan from Bob. Your asset is still $10,000, your liability is now $0 (canceling it out). Is your equity $10,000, or just nonexistent since there's no liability? Is equity's existence dependent on liability's existence?
Mike, who'da thunk that you were so funny??? I'm in for the life of this blog; if not for the learning, for the laughter! My little sister sure is lucky to have you as her man.
ReplyDeleteLets go camping!!!
Jason
Rob!
ReplyDeleteMy most humble apologies in not getting back on this sooner! I guess I was a little shocked that someone actually checked out the blog - AND left a comment :-)
The quick and dirty (or slow and baptized) answer would be: Yes, your equity is now 10 "large" as they say in "the hood" - or $10,000 for those of us unfamiliar with cool-people lingo.
Pretty simple stuff, really. Accountants just use big words like "equity" and "deferred tax liability" because if we didn't - then people would start doing their own accounting work and I'd be back to washing dishes at SuCasa *shutter*