Balancing Assets & Debt

Balancing Assets and Debt

We try to help you answer the question: Is my personal balance sheet "balanced?"

We all have assets and most of us have debt. You must wonder whether you're managing it all properly. (Most banks' core business is all about managing assets and liabilities. They even have whole departments dedicated to this task every day.) Have you thought through it logically?

Is Debt Evil?

For some people, all debt is bad. They pay down their debt as quickly as possible and don't want to incur any additional debt. This is certainly a relatively safe strategy and may help avoid some sleepless nights, but it's not likely to be the optimal strategy. After all, if you could get a five-year loan with 2% interest and invest the money into an ultra-safe investment earning 4%, you’d make 2% interest as profit with little "real" work. In that case, is debt bad?

It's a tough question to answer. A banker would likely say that debt is fine as long as it's funding higher yielding, risk-adjusted assets. But as we all now know from recent experience, bankers can be very wrong in their projections of risk and asset quality. An asset that is expected to yield 8% may actually lose money or even get wiped out entirely. Of course, the debt that funded the asset is still there. So what seemed like an easy-money strategy could result in bankruptcy!

Bankruptcy Is Waiting for You.

Unfortunately, for many of us, bankruptcy can be just a few missed paychecks away. Therefore, it's critical to first set up a "Reserve" (or emergency) fund that is ultra-safe and considered untouchable until calamity strikes (which it likely will at some point in your life). Therefore, if you lose your job or get sick, you'll have some cash to fall back on. ourLibra prioritizes this important task when it tries to help you.

Living with "Evil"

In the end, how much debt (or "leverage" in finance terms) you’re willing to live with is more about personal preferences and risk tolerances than anything else. ourLibra will let you input your income, expenses, "liquid" (meaning relatively easy-to-turn-into-cash) assets, and your debt to then make recommendations based on your individual situation and preferences.

Risking the Future to Save the Present

While many personal finance experts are absolutely opposed to touching retirement accounts to pay down debt, ourLibra does include it as an option. The government also doesn't like it when people tap into their retirement accounts before retirement and imposes some pretty stiff penalties for doing so. That said, it's possible that your debt costs are so high and onerous that it still makes sense to tap into these accounts so that you can get out of a debt death spiral, start saving again, and eventually have more in your retirement accounts that you would have otherwise. If you’re going to do this, you MUST be sure that you are disciplined enough to only use it to pay down debt rather than to support more spending that is beyond your means.

Of course, ourLibra isn't perfect (at least not yet anyway). If you find a situation when ourLibra’s behavior just doesn't make sense, please let us know. With your feedback, we can make it better.