Understanding the Ideas of Chapter 4, with Charts and Tables
Let’s look at the exact same situations but with some charts and tables. Consider a scenario—we’ll call this Jane Scenario A: No Debt!—where an individual named Jane is renting a house, has no material assets, has just inherited $1 million, and is close to retirement. Jane is debt-averse and decides she wants to buy a home worth $500,000 outright, with no mortgage (after all, that is what all the popular authors told her to do!). This would leave her with a $500,000 investment portfolio.
(It is essential to note that one could arrive at the following balance sheet over time through any number of different ways outside of inheritance. Inheritance just makes it easy to understand exactly how this hypothetical situation came to be.)
At this point Jane has no debt, no possessions valuable enough to include in these calculations, and a net worth of $1 million, as shown in the balance sheet in Table B.1.
Table B.1 Balance Sheet—Jane Scenario A
|Original Scenario A Balance Sheet|
|0% debt ratio|
What about income? If Jane’s investment portfolio returns an average of about 6 percent, she would be making roughly $30,000 in income per year, as shown in the income statement in Table B.2. (For purposes of illustration, Jane’s other income sources will be ignored. Also, all ...