Discussion 2 - Personal Finance PDF

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Personal Finance...

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What are the purposes and uses of assets? Assets serve many different purposes and uses. Mainly, assets are used to create income, increase wealth, and reduce expenses. For the purposes of investment, assets can either increase wealth or create income through the process of reducing one’s expenses. There are many kinds of assets available to choose from and investing in assets or selling capital can be more profitable than selling labor (Siegal & Yacht, 2009). It is worthy to note that assets can also be converted to cash and the result of selling assets results to either a capital gain or a capital loss.

What is the main risk of buying or borrowing capital to invest in an asset? Buying capital to invest in an asset means you engage in shared ownership or equity. The main risk involved is the probability that the value of an asset, income, or investment may decline in the future (Siegal & Yacht, 2009). This risk is placed upon the shareholders as each one is not only entitled to share in the future gain but also in the future loss of the asset value. Therefore, the decision to buy capital has to be weighed properly in order to be able to repay out of future earnings. Borrowing capital to invest in an asset means you are renting from someone’s money. This puts you in a cost of debt because you have to pay interest on top of the principal amount you have borrowed. Since there the returns are not guaranteed, the main risk supposes that your investment’s earnings must at least cover to pay the interest while its growth in value must be enough to repay the principal amount (Siegal & Yacht, 2009). Debt is the biggest liability when it comes to borrowing capital.

What financial factors should you consider when deciding to borrow capital? The financial factors that one should consider when deciding to borrow capital are as follows: risk, debt, and the cost of debt. Borrowing capital requires careful decision making by accepting the fact that there is probability that the asset value will decline in the future, that the loan has to be repaid at the agreed time, and interest has to be repaid together with the original loan amount. Therefore, ideally, the asset has to be able to increase its earnings, decrease expenses, increase wealth, or all of the above. As such, the asset has to yield productive results in order to cover the cost of debt and financing. Reference: Siegal, R. & Yacht, C. (2009). Personal Finance. Saylor Foundation. Licensed under Creative Commons CC BY-NC-SA 3.0....