8 ms·

When you take out a loan, it doesn't decrease your net worth, right? If I'm worth $X, then I take out a $1MM loan, at that moment I'm still worth approximately

by jcheng 7y ago

When you take out a loan, it doesn't decrease your net worth, right? If I'm worth $X, then I take out a $1MM loan, at that moment I'm still worth approximately $X (because the $1MM the bank gave me and $1MM I owe the bank cancel each other out). So I'd rank them as: - Billionaire - Home owner - Minimum wage earner - Neurosurgeon

lonelappde 7y ago
Why is a house an asset but an education isn't? Do you think a potential spouse would pass over the neurosurgeon?
- indecisive_user 7y ago
  A house is a nearly guaranteed asset. The value will likely steadily rise throughout the years, and with good homeowners insurance you'll get paid even if the house is destroyed. An education guarantees nothing. The neurosurgeon could die, or suffer an injury preventing them from performing surgery, or just plain quit and decide to pursue art instead. Of course the neurosurgeon has a significantly higher potential future value, but it's an unrealized asset. Also, it's possible to discharge a mortgage through bankruptcy, while student loans are much more difficult to discharge, so you're effectively stuck with that debt forever regardless of your career choice.
  - mulmen 7y ago
    I see how a house can be considered an asset but if you sell your house where do you live? Sure you can downsize but it's still not purely an asset, you are using it at least in part to fulfill a basic human need.
    - mindentropy 7y ago
      > I see how a house can be considered an asset but if you sell your house where do you live? Give the house for rent and live in a smaller house.
      - mulmen 7y ago
        Is that smaller house still an asset?
        mindentropy 7y ago
        It would be an investment and an asset, yes. If you take a loan for the smaller house you can pay it off using the rent of the bigger house. At the end you will have two houses. It can be a gift to your children as they do not have to struggle in life to buy a house which is a real pain. Comparing it with education, you cannot transfer education and its value. It will die with you. In IT there is a chance that your education will get outdated really soon with no value. This is similar to the housing market but atleast in this case there is a chance that the market will go up. In case of IT education there is no chance and the value will hit zero. For your retirement a house giving constant rent is I think your most valuable asset as you never know if you outlive your retirement savings.
  - CaptainZapp 7y ago
    nearly and likely being key here. The 2007 / 2008 financial crisis was partially triggered by the fact that this age old adage is not necessarily true.
  - Shorel 7y ago
    I would put some numbers to each risk. Like: 1.5% of neurosurgeons suffer an injury that prevents them from performing surgery. Then adjust all calculations based on this. As with everything: to know if a single flip coin is going to be heads or not is basically impossible, but over a large enough number, you can be certain the number of heads will be close to 50%. A single neurosurgeon? Who knows? The entire population of neurosurgeons? Now we can use actuarial science and measure everything in micromorts.
  - collyw 7y ago
    So without the insurance, then the house would be similar to the neurosurgeon? A natural disaster could wipe it out. And can't a Neurosurgeon take out equivalent insurance to cover the worst case scenarios that you described? I am sure I have heard of famous singers insuring their voices.
    - melcor 7y ago
      Almost. A house can be liquidated and potential profit realized rather quickly. Education, not so much. You can insure yourself (and should, if you could lose your work by getting in an accident), so that you get a set amount paid out each month in case you end up in a wheelchair or similar state that would keep you from working.
  - mindentropy 7y ago
    > An education guarantees nothing. This is a beautiful point. I feel in a country where the Government is stable most of the people would go for higher education thinking it is an asset. The real asset is tangible resources like a house, land, farm etc. In a country where the Government is unstable it is better to have an education so that you emigrate to a better country with your education as the ticket.
- joejerryronnie 7y ago
  Because a bank can’t foreclose on your education if you default on a loan.
- cbluth 7y ago
  Can you sell your education and get it's cost back?
- anm89 7y ago
  You are conflating the general use of the word asset with the specialized meaning with in finance. You can't sell your education back for currency and you can't put it on a balance sheet. You could and people have tried to make derivative securities to commoditize people's educations and then you could try to literally sell your education (or more like future returns on your work based off your education) but until you do that it's not a liquid asset.
- danmaz74 7y ago
  It's about liquidity. Education is a very illiquid asset.
- ggambetta 7y ago
  Oh god, I hope the potential spouse bases their decision on factors other than net worth. I don't want to live in that awful world.
  - ggambetta 7y ago
    It's hilarious/sad that I got downvoted for saying that...
WalterBright 7y ago
> When you take out a loan, it doesn't decrease your net worth, right? Quite right. If you dissipate the borrowed money, though, your net worth will go down by the amount of the loan. If you invest it, and the investment does better than the interest on the loan, your net worth goes up.
TuringNYC 7y ago
I appreciate how your ranked Neurosurgeon at the bottom -- because under the typical system, future earnings are not NPV'd, so in the case of Neurosurgeon, you only see the liability but don't account for the extraordinary earnings potential.
- yabadabadoes 7y ago
  I think a neurosurgeon is uniquely qualified to understand the dangers of putting all your baskets in one egg. But more seriously, I think its pretty wrong for a tax system to tax on future perceived value whenever there is an option to tax based on consumption and use (i.e. living in the home and working with the educated brain.)
brownbat 7y ago
Good point, especially as to the homeowner, I think we can tweak the cases. Though naturally the billionaire bribes an appraiser to undervalue all the new assets for tax purposes though, right? :) Ok, half joking. More seriously I expect some large investment projects we could use have a value that will only materialize after significant work and capital are burned. You buy a run down warehouse, the debt and building wash out, but you spend a ton of work turning it into the hip new place for aspiring restauranteurs... there's a gap before it's really obvious to the world what you're accomplishing. The debt for the building washes, but early expenses for clean up, refurbishing and advertising would look on paper like they're disappearing. Maybe I should use a hypo like that instead. The biggest problem is that ability to carry debt correlates with expected ability to pay in the future. If someone trusts you to borrow in a way where you immediately burn the money and spiral yourself way negative, however you manage to get there, odds are you are very well off or very convincing. Net worth might be like a horseshoe. The best off might be those both way at the high end and millions in the negatives.

by jcheng 7y ago

lonelappde 7y ago

Why is a house an asset but an education isn't? Do you think a potential spouse would pass over the neurosurgeon?

indecisive_user 7y ago
A house is a nearly guaranteed asset. The value will likely steadily rise throughout the years, and with good homeowners insurance you'll get paid even if the house is destroyed. An education guarantees nothing. The neurosurgeon could die, or suffer an injury preventing them from performing surgery, or just plain quit and decide to pursue art instead. Of course the neurosurgeon has a significantly higher potential future value, but it's an unrealized asset. Also, it's possible to discharge a mortgage through bankruptcy, while student loans are much more difficult to discharge, so you're effectively stuck with that debt forever regardless of your career choice.
- mulmen 7y ago
  I see how a house can be considered an asset but if you sell your house where do you live? Sure you can downsize but it's still not purely an asset, you are using it at least in part to fulfill a basic human need.
  - mindentropy 7y ago
    > I see how a house can be considered an asset but if you sell your house where do you live? Give the house for rent and live in a smaller house.
    - mulmen 7y ago
      Is that smaller house still an asset?
      - mindentropy 7y ago
        It would be an investment and an asset, yes. If you take a loan for the smaller house you can pay it off using the rent of the bigger house. At the end you will have two houses. It can be a gift to your children as they do not have to struggle in life to buy a house which is a real pain. Comparing it with education, you cannot transfer education and its value. It will die with you. In IT there is a chance that your education will get outdated really soon with no value. This is similar to the housing market but atleast in this case there is a chance that the market will go up. In case of IT education there is no chance and the value will hit zero. For your retirement a house giving constant rent is I think your most valuable asset as you never know if you outlive your retirement savings.
- CaptainZapp 7y ago
  nearly and likely being key here. The 2007 / 2008 financial crisis was partially triggered by the fact that this age old adage is not necessarily true.
- Shorel 7y ago
  I would put some numbers to each risk. Like: 1.5% of neurosurgeons suffer an injury that prevents them from performing surgery. Then adjust all calculations based on this. As with everything: to know if a single flip coin is going to be heads or not is basically impossible, but over a large enough number, you can be certain the number of heads will be close to 50%. A single neurosurgeon? Who knows? The entire population of neurosurgeons? Now we can use actuarial science and measure everything in micromorts.
- collyw 7y ago
  So without the insurance, then the house would be similar to the neurosurgeon? A natural disaster could wipe it out. And can't a Neurosurgeon take out equivalent insurance to cover the worst case scenarios that you described? I am sure I have heard of famous singers insuring their voices.
  - melcor 7y ago
    Almost. A house can be liquidated and potential profit realized rather quickly. Education, not so much. You can insure yourself (and should, if you could lose your work by getting in an accident), so that you get a set amount paid out each month in case you end up in a wheelchair or similar state that would keep you from working.
- mindentropy 7y ago
  > An education guarantees nothing. This is a beautiful point. I feel in a country where the Government is stable most of the people would go for higher education thinking it is an asset. The real asset is tangible resources like a house, land, farm etc. In a country where the Government is unstable it is better to have an education so that you emigrate to a better country with your education as the ticket.
joejerryronnie 7y ago
Because a bank can’t foreclose on your education if you default on a loan.
cbluth 7y ago
Can you sell your education and get it's cost back?
anm89 7y ago
You are conflating the general use of the word asset with the specialized meaning with in finance. You can't sell your education back for currency and you can't put it on a balance sheet. You could and people have tried to make derivative securities to commoditize people's educations and then you could try to literally sell your education (or more like future returns on your work based off your education) but until you do that it's not a liquid asset.
danmaz74 7y ago
It's about liquidity. Education is a very illiquid asset.
ggambetta 7y ago
Oh god, I hope the potential spouse bases their decision on factors other than net worth. I don't want to live in that awful world.
- ggambetta 7y ago
  It's hilarious/sad that I got downvoted for saying that...

WalterBright 7y ago

> When you take out a loan, it doesn't decrease your net worth, right? Quite right. If you dissipate the borrowed money, though, your net worth will go down by the amount of the loan. If you invest it, and the investment does better than the interest on the loan, your net worth goes up.

TuringNYC 7y ago

I appreciate how your ranked Neurosurgeon at the bottom -- because under the typical system, future earnings are not NPV'd, so in the case of Neurosurgeon, you only see the liability but don't account for the extraordinary earnings potential.

yabadabadoes 7y ago
I think a neurosurgeon is uniquely qualified to understand the dangers of putting all your baskets in one egg. But more seriously, I think its pretty wrong for a tax system to tax on future perceived value whenever there is an option to tax based on consumption and use (i.e. living in the home and working with the educated brain.)

brownbat 7y ago

Good point, especially as to the homeowner, I think we can tweak the cases. Though naturally the billionaire bribes an appraiser to undervalue all the new assets for tax purposes though, right? :) Ok, half joking. More seriously I expect some large investment projects we could use have a value that will only materialize after significant work and capital are burned. You buy a run down warehouse, the debt and building wash out, but you spend a ton of work turning it into the hip new place for aspiring restauranteurs... there's a gap before it's really obvious to the world what you're accomplishing. The debt for the building washes, but early expenses for clean up, refurbishing and advertising would look on paper like they're disappearing. Maybe I should use a hypo like that instead. The biggest problem is that ability to carry debt correlates with expected ability to pay in the future. If someone trusts you to borrow in a way where you immediately burn the money and spiral yourself way negative, however you manage to get there, odds are you are very well off or very convincing. Net worth might be like a horseshoe. The best off might be those both way at the high end and millions in the negatives.