During the Internet bubble, many chose to buy stock rather than pay down their home mortgages. Some even borrowed against their homes to...

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During the Internet bubble, many chose to buy stock rather than pay down their home mortgages.

Some even borrowed against their homes to buy stocks. They ended up with a 30-year debt and nearly valueless stock.

More recently, a life-insurance salesman has suggested that we should choose life insurance over equity in our homes.

Many who pursue that idea will end up with a 30-year debt and an expensive life-insurance premium.

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Both ideas are wrong.

They are wrong because we need two kinds of capital in our lives, personal and financial. Ultimately, we need both, unencumbered by debt, because it will simplify our lives while reducing risk.

The hard part is building our ownership stake in either.

Understanding that our personal capital, like our financial capital, has to deliver useful returns is another hard part.

Financial assets provide us with a return in cash income. The cash will help us get through the day, month or year when we can’t work.

Sometimes financial assets also increase in value. The increase creates the possibility of having cash sometime in the future.

Either way, it is helping us get through the day, month or year without work.

The return on personal capital — all the things we use in our daily life — isn’t so visible. It is in services, not cash.

The clothes you wear to work provide a return in services. With the exception of a wedding tuxedo, no one thinks about renting clothes because it doesn’t make sense.

Similarly, the car you drive provides a return in services. Without it, you would have to hire taxicabs or take public transportation on its route and timetable.

You own a car because you can’t get the same point-to-point service for less money.

According to the American Automobile Association, for instance, it costs $18.69 a day to own and operate an average car that is driven 10,000 miles a year.

And the AAA figures assume you pay $2 a day to finance the car.

If you owned the car free and clear, you’d have an invisible “return” on your equity of $2 a day, tax-free. It would be invisible because you would receive no cash income. That’s also why it would not be taxed.

That’s also why debt-free homeownership is a good thing. You will have the shelter services of your home whether it is mortgaged or debt-free, but every bit of debt requires a monthly payment. The payment can be greater than the value of the shelter services you receive.

Our long-term goal with everything that we own and use should be to enjoy its services at minimal cash cost. That means little or no debt.

Is there a limit to this?

Yes — and this is the really hard part.

Millions of people are rich in personal assets but poor in financial assets. They have the appearance of affluence because they have expensive and impressive personal assets. Take away their jobs, however, and they will have to sell their house, cars, furniture and jewelry to buy food because they have virtually nothing in financial assets.

We rediscover this during every recession.

So what should you be doing right now?

Start at the top of your debt pyramid. Work your way down paying it off.

First, eliminate your credit-card debt. Pay off new charges every month.

Second, eliminate your asset-based consumer debt — your car loans.

Third, start building a fund of ready cash.

Remember, cash can become anything that you want it to be. Ready cash is the ultimate status symbol.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.