What are assets, and why are they important?
According to the oxford dictionary, an asset is a useful or valuable thing, person, or quality. Your passion, your energy, your drive, etc. are some of your greatest assets. The people who motivate and challenge you to be great are also assets. These are people you need to keep around to aide in pursuit of your financial assets. A financial asset is a valuable economic resource that provides more uses/benefits than restraints. These resources can be either tangible (e.g., money, real estate, businesses, and precious metals) or intangible (e.g., intellectual property: trademarked, patented and copyrighted material), and have seemingly endless earning potential. Simply put, an asset contributes to, far more than it bleeds, your resources.
What are the types of personal assets?
There are two main asset classes: appreciating and depreciating assets. The names are somewhat self-explanatory so let's delve a little deeper.
Appreciating assets.
Appreciating assets perpetually increase in value over time. For example, gold, silver, land, certificate of deposit, stocks, and bonds. Appreciating assets are the type of assets that each individual should try to hoard. These are worth more the longer you hold them. If possible, you should keep these for at least a year before disposing of them. Sound desirable, right?
Depreciating assets (Liabilities) and their significance.
The second class of assets is depreciating assets. These decrease in value over time. They are most commonly referred to as liabilities. The oxford dictionary defines a liability as a thing for which someone is responsible, especially a debt or financial obligation. Therefore, a liability is anything that perpetually depletes resources through immediate or future financial obligations, and they lose value in the long-term. So while you are adding money through maintenance and using the asset, it is still losing value as time passes. Buildings, cars, electronics, loans, clothes, and food are great examples of liabilities to which we all are subjected at some point in our lives. Some of our liabilities are basic needs which cannot be avoided, but others are luxury and should be minimized where possible.
Is my home an asset or a liability?
Even though liabilities in general drain available resources, they are not all bad. For example, owning a home is considered an asset by the bank in calculating one's creditworthiness, even though the building is, in fact, a liability. Buildings continuously lose value as a result of wear and tear. However, a building is a significant investment that is placed in your asset column when calculating creditworthiness. As a result, your home can be leveraged for your benefit. You can borrow against the equity/remaining value (market value of home - mortgage/loans against the home = home equity) in your home and use this asset expansion for investment purposes. In other words, you can refinance your home and use the money gained to invest in a second home, a rental property, a business, gold, silver... the possibilities are endless.
How to calculate your net worth.
One might ask, why is this conversation relevant? Good question! To assess one's net worth, you deduct liabilities from assets (assets - liabilities = net worth). A person's net worth is essentially their value based on their possessions. It is important to know your net worth because this helps you understand your current financial standing and use it as a reference point for your goals. So let's say you currently have savings and investments (appreciating assets) valued at $100 and loans and bills (liabilities) valued at $95, your net worth would be $5. Ideally, as you work and save your net worth should increase. If your goal for your net worth is $100, you would need to find means of increasing your assets and/or decrease your liabilities. This requires lots of discipline, as you would be required to change some habits. For instance, instead of eating out for lunch every day, try packing lunch twice a week; and Instead of having Netflix available on multiple devices (the most expensive package) choose a less expensive package that is practical for you. Managing and tracking your net worth can be a fun little game that you and a friend partner on. Grab a friend and start tracking your progress today.