Personal Assets

The fourth bucket is your personal assets . These include all of the physical things that you buy over time such as your house, your car, a second home, art and jewelry, boats, and airplanes . These types of assets will vary greatly between people but there are a few general concepts that usually hold true for almost everyone .

First, other than minor purchases such as household items, clothes and other small items, many of these assets have a mortgage associated with them . Second, if there is an associated mortgage they often involve some sort of down payment, usually in the 20% range . Third, in the case of real estate, these assets usually appreciate over time and as the debt is paid down the “equity value” increases due to appreciation and debt reduction. Fourth, often as a person’s overall wealth increases, the number and value of these assets will increase as well . Fifth, usually as debt is paid down and the value of assets increase, these personal assets can be used to fund family expenditures such as another purchase or educational expenses. This is usually done via refi nancing or borrowing on a Line of Credit secured with a second deed of trust . Sixth, as a person grows older and gets closer to retirement, they might be motivated to liquidate some of these assets .

A nice thing about personal assets is that as you build equity, you can use that equity to acquire more personal assets. This is illustrated in the chart on the next page with three families—the Smith Family, the Jones Family and the Peters Family . All of the families decided to purchase a home where they can start a family . Each family makes a $100,000 down payment and takes out a $400,000 mortgage . The Smith Family takes out a 30 year mortgage while the Jones and Peters families take out 15 year mortgages . All of the mortgages are at 5% . Also assume the

properties all appreciate at 3% per year . One day, the Peters Family realizes that they want to

Smith Family Jones Family Peters Family

Total Mortgage Principal Payments $ 400,000 .00 $ 400,000 .00 $ 600,000 .00

live in a bigger home and after 15 years of paying off his mortgage he decides to acquire a $1 mil

Total Mortgage Interest Paid $ 380,617 .22 $ 178,053 .73 $ 267,080 .59

Total Mortgage Payments $ 780,617 .22 $ 578 .053 .73 $ 867 .080 .59

lion property . Using their equity they buy a new property for

Property Value (Year 31) $ 1,213,631 .24 $ 1,213,631 .24 $ 1,512,589 .72

$1,000,000 and only need to take

Net Profi t (Year 31)

$ 433,014 .01 $ 635,577 .51 $ 645,509 .14

out a $200,000 mortgage which will be paid over 15 years . Even though he does have to take out

Each family paid $100,000 down payment on a $500,000 home in Year 1 . Each mortgage had a 5% interest rate . Property values grow at 3% annually. The Smith family took out a 30-year mortgage; the Jones family took out a 15-year mortgage and the Peters family took out a 15-year mortgage, but purchased a new home worth $1M using built up equity in Year 17 .

a new $200,000 mortgage, at the end of year 31 he has fi nished paying off his debt and his property is worth much more than the Smith and Jones families.

When personal assets are purchased they often use up some of the money in the Liquid Assets Bucket and when they are liquidated they usually produce a lot of cash that can be added back to that bucket . Unlike the assets in all of the other buckets, there usually is a lot of fi lling and emptying this bucket over the course of one’s life. Several examples of personal assets that you might own throughout your lifetime are shown in the picture on the next page .