Acker Financial

Which is the better financial choice? You purchase a new car by paying $1,000 down, then $500 per month for 36 months, or you lease a new car for $400 per month for 36 months, with $500 due at signing?

Either option could be viable, depending on your financial strategy, and for the sake of this discussion, we’ll leave the calculators and depreciation tables in the desk drawer. However, if one only considers the impact of the two options in terms of equity, the purchase will likely be the better option.

Why?

Because you cannot build equity in any asset that you lease.

To understand equity, and by extension, to understand balance sheets, we must understand the accounting formula. The accounting formula is as follows:

Assets = Liabilities + Equity.

This formula may seem counterintuitive if you’ve been taught Assets-Liabilities = Equity (which is still mathematically correct). However, in terms of financial tracking, and planning, we make the assets the sum of the liabilities plus equity.

Wait, don’t leave. This gets better.

The premise of the accounting formula is that every financial transaction has an element that impacts both sides of the equation.

Suppose you work a 40-hour week, and for your efforts, you are paid $400. You now have $400 in cash. That cash would be entered onto the left side of the equation under assets (usually in a special sub-category called “cash”). On the right side of the equation, we would enter that $400 under the “equity” column (usually in a sub-category called, “revenue.”) Both sides of the equation now equal $400.

Now, suppose you have to pay $100 of that $400 in taxes. We would deduct the $100 from the left side of the equation, and enter the $100 into another sub-category of the equity column called “expenses.” This would reduce the equity by $100. So, both sides of the equation now equal $300.

So, you need a place to live. So, you purchase a $250,000 home. You now own a home worth $250,000. That is an asset, so we enter the $250,000 on the left side of the equation in the “assets” column, subcategory “long-term assets.”

However, you didn’t have $250,000 in cash to purchase the home, so you borrowed it. The principle amount of the loan is entered under the “liabilities” column of the right side of the equation.

Each payment toward that loan is deducted from “cash” under assets on the left, with the principle being deducted from the “liabilities” column on the right, and the interest being entered as an expense under the “equity” tab.

Confusing? Maybe. If you need additional help understanding the accounting formula, check out this post from Investopedia.

It is worth noting that the accounting formula is almost exclusively used to track the financial health and profitability of businesses and corporations. However, by applying the same formula to our personal finances, we can learn to manage our money in a way that improves our financial standing and places us in a position of stability.

Take the example of the car purchase. Sure, the leasing option may result in lower monthly payments and less cash flowing outward, however, no equity is built into the automobile. (The same holds true for houses. Renting is often the easier option, but you never gain equity in the home).

While cars depreciate over time, they can be traded in for newer vehicles, borrowed against, or sold for a return if no longer needed. Leased cars can only be turned in to terminate the payment.

Term Life Insurance is a popular option for many individuals, as it is relatively inexpensive to purchase a large amount of coverage. It’s entirely possible to insure your life for close to $1 million for the price of a tank of gas. To try out the affordability of term life insurance, click here.

Term life insurance is a great product and should be part of most people’s portfolios. However, term life insurance does not build equity, neither does it provide an asset to the customer. It merely protects the beneficiary against the financial devastation caused by the insured’s death.

Cash value life insurance, on the other hand, provides the customer with equity, a cash value, which can be leveraged to acquire other assets, start businesses, or fund long-term care. Examples of cash value life insurance include universal life and whole life insurance.

At Acker Financial, we want to help you discover strategies to build equity. To do this, it helps if we’re able to meet, in person or via Zoom, or at least be able to trade emails.

And if you would like to explore the idea of cash value life insurance, contact us below. We have access to multiple companies, and can compare the price and cash value performance across a number of different policies and companies.