2023-10-15 22:59:12
The best way to manage your personal finances is by knowing the real value of your assets and debts and how long you will have them. For this, the amortization It is a method that can help you calculate said information at any time. We tell you what it means and how you can take advantage of this concept.
On some occasion you have heard the word amortization in work environments or in your own family economy and whose meaning may generate many doubts, because it is not always used to say the same thing, so you will have heard phrases like “the use of this car has already been amortized” or “the term of amortization of the loan will be 5 years.” At first glance the two phrases seem to indicate different things.
First of all, you should be clear that the concept of amortization, in general, refers to the decrease in value distributed over time. If it is an asset such as a car or a computer, it is normal that over the years its economic value and benefits will decrease, while if it is a financial obligation such as a loan or a mortgage, it also happens that the amount owed It will decrease with the payment of the installments. Therefore, the key for you to understand what the amortization In each case it is to identify whether you are talking about an asset or a liability.
This is how depreciation works on assets
Assets are all the goods or resources that you have in your possession and from which you expect to receive a benefit or benefit. during a certain period of time. From the mobile phone or computer you use to study or work to the shoes you wear when going for a run, these are goods for which you have paid money to fulfill a specific function.
If you take into account that, as we have explained before, the amortization is the decrease in value over time, then all these assets will lose their capacity or benefits -the value- while the useful life -the time- for which they were designed passes. As an example, if you have purchased a television with a useful life of 10 years at a price of 1,000 euros, then it is possible to say that at the end of 10 years that purchase will be amortized, since the television will have fulfilled its function during the time for which it was manufactured. That is, its initial value will gradually decrease as you benefit from its use.
It is possible to know what is the amortization of said television over the course of 10 years. One of the most used formulas is that of amortization annual, which consists of dividing the initial cost of the asset by the estimated useful life (1,000 euros/10 years). The result is 100 euros per year. During the first year you will have amortized 100 euros of the cost; during the second, 200 euros; during the third, 300 euros; and so on until the total amount paid is exhausted. If at the end of its expected useful life the TV is still working, that extra time is known as its residual value.
This is how amortization works on liabilities
Liabilities are understood to be the financial obligations that you have contracted, whether through consumer credit, a bank loan or a mortgage, among others. In this case, the amortization It is the gradual decrease of the debt -the value- thanks to the payment of the agreed installments -the time- with the bank. Generally, when talking about the amortization of a liability is taken into account only at the capital value, without including the interest generated.
These are the methods to calculate the amortization of liabilities, but some of the most used are:
System of amortization French. It is also known as a fixed installment system and consists of returning the same amount of money each month until the obligation has been paid in full. Although in this type of amortization The value of the installment is the same, interest is usually included in the first installments, leaving the payment of the capital for the final part.
System of amortization growing. As its name indicates, with this method the installments start with a lower value, but increase as the time of the obligation passes. It is usually used by those who, at the time of starting amortization, They do not have enough resources, but they are waiting to have greater liquidity in the future.
Decreasing amortization system. With this option, a part of the debt itself is paid from the beginning, so the new interest generated by the remaining capital is lower and translates into a lower payment.
Amortization and mortgage They are two words that are usually closely related when buying a home, since it is the time agreed upon to return the money you have borrowed. For this reason, at Openbank they have prepared the following content with which you will learn how to amortize the mortgage so that it is more profitable.
For this reason it is useful to understand what amortization is
After explaining what the amortization and how it is used in assets and liabilities, it is also convenient that you know the importance of managing this concept in daily life. In addition to using your calculation to know with certainty the real value of the assets and liabilities you own, It also helps you make decisions in your economy that contribute to maintaining good financial health.
To better understand, when you use collaborative economy applications and want to buy or sell items, it is possible to know the current value of said goods thanks to the calculation that we have explained to you in the amortization annually and in which aspects such as the time of use of the products and the original cost are taken into account. It is also very useful to calculate amortization in the case of technological devices and equipment, Well, this information helps you anticipate its replacement and allocate a part of the savings in the budget so that it does not unexpectedly affect your finance.
Finally, if you require a loan to buy an asset, you should know the length of time amortizationboth of the asset and of the financing method itself, since, in this way, You will avoid mistakes such as assuming a debt to buy an asset that will lose its value even before the obligation is settled.
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