9.1. Property and Debt: An Introduction

To make the most of Quicken's property-and debt-tracking features, it helps to understand a few basic concepts:

• Assets are things you own that have value: your house, car, appliances, and that baseball signed by Mickey Mantle. By tracking the value of your assets in Quicken, you're on your way to figuring out how much you're really worth. (By the way, your physical assets don't count, even if you earn your living as a supermodel.)

  The asset accounts (and liability accounts) that Quicken uses to track property and debt have registers—just like checking accounts. As you can see in Figure 9-1, transactions you record reflect changes in asset value: paying off mortgage principal, depreciation, and home improvements.

  Quicken has specialized asset accounts for houses and cars. If you have other items of value (like jewelry, artwork, and so on) that you'd like Quicken to include in your net worth, you can create asset accounts for them as well.

  Figure 9-1. An asset or liability account's register lists transactions that increase or decrease the balance in the account. For example, the principal that you pay off each month with your mortgage payment decreases—hallelujah!—the balance in your mortgage liability account. If you finish renovating your basement, then you can add a transaction to your house asset account to reflect its increased value.

  

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  Tip:

  There's no need to create separate asset accounts for every last item you own, even if you want Quicken to track the value of your personal property. You can create a single asset account that includes your estimated value of things like furniture, clothes, tools, and so on.

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• Liabilities represent money you owe, whether for an asset, like a house or car, or something less tangible but no less important, like your college education. In Quicken, you create liability accounts for the money you borrow. If you borrow money to buy a car, purchase your home, and pay for your child's college education, you create a liability account for each debt (whether or not it's secured by an asset that you own).

• Loans. When you borrow money, the loan is your legal commitment to pay the money back. If you've purchased a house, you already know the mountains of paperwork involved. One crucial item is the loan document, which describes the amount being borrowed (the principal), the interest rate, the length of the loan, the number of payments, and how much principal and interest you fork over with each payment.

  Most loans amortize your payoff: The monthly payment remains fixed, but the ratio of principal to interest changes. Early in the loan's life, your payments are mostly interest and very little principal—which is great for tax deductions. By the end, your payments go almost entirely toward paying off principal. Constantly changing allocations sound like a tracking nightmare, but Quicken easily handles amortized payments. It calculates your loan amortization schedule, assigns the principal and interest in each payment to the appropriate categories or accounts, and even handles escrow payments (the amounts that your mortgage company collects in advance to pay property taxes and property insurance premiums when they come due), so you conserve your brain power for more interesting things.

• Equity and net worth. The equity you hold in an asset is the asset's value minus the balance you owe. For example, if your house is worth $200,000, and the balance on your mortgage is $125,000, you have $75,000 in equity in your home.

  Net worth is the big picture of equity—the value of all your assets minus the balance of all the money you owe. Net worth is a key measure of your financial health. For example, you might own houses, cars, boats, and other toys that are worth $4,000,000. But if you borrowed $3,950,000 to buy them, you're still a financial pauper with a net worth of only $50,000. On the other hand, a couple who have a house, car, and retirement fund with a combined value of $850,000, and a mortgage balance of only $25,000 are well on their way to millionaire status with a healthy net worth of $825,000.

  By linking loans in Quicken to the corresponding asset accounts (linking your mortgage with the asset account for your home, for example), you can see how much equity you have in each asset, as well as your overall net worth.