Have you ever encountered someone calling you an “asset” in an organization? Well, we all have been there, haven’t we?
Here, we delve a bit deeper into what they meant when they called you an asset. Of course, we shall analyze the term asset in the context of personal finance and why people keep using it when they mostly do not mean it. This article will give you the lowdown on different kinds of assets to enable you to take an informed investment decision. So let’s dig right in.
Asset has inherent economic value
Simply put, an asset is a resource. A resource that a firm, a country, or an individual owns in the hope of getting economic benefit from it in the future. In a purely financial context, an asset is anything with an economic value capable of generating cash flow, improving sales, or even reducing expenses, over time.
More importantly, the owner must hold absolute rights over anything for it to be considered an asset. For instance, you can’t say Bitcoin (BTC) is an asset unless you hold it in any capacity, be it over an exchange or on a wallet.
How do assets work?
Assets, despite having some economic value, aren’t just about generating cash flow. A vehicle can be an asset if it takes you from one place to another faster, helping you save time. And we do say that time is money.
Based on what we have covered till now, assets need to have the following properties:
- Economic value
- Resource-like traits
- Associated ownership
Also, the type of asset you have on your hand depends on a host of factors, including:
- Usage: Mostly business assets owned by companies (like equipment)
- Convertibility: Concerns assets that one can easily convert to cash (liquid ones like mutual funds, crypto, and equities)
- Physical existence: Resources of some economic value that are present offline or even online (land, machinery, house, domain names, trademarks, access to specific places, and patents)
As the names and tags suggest, each asset has a different way of generating value for you.
However, just owning the asset isn’t enough. You must keep evaluating the value of every asset constantly to analyze if it is generating something for you. Examples of asset evaluation include periodically checking your portfolio, accounting for amortization, etc.
Types of assets
For the purpose of this article, we will focus on convertibility and physical existence as the criteria for determining the type of assets. Here are some asset types worth discussing, keeping personal finance requirements in mind:
- Current assets
- Fixed assets
- Intangible assets
- Financial assets
Let’s discuss each asset type in detail:
What are current assets?
Current assets are easily convertible, which means you can use them as cash or cash equivalent within a year or so. Current assets include cash, inventory, crypto, equities, and short-term financial deposits. Mostly, you can consider current assets as liquid assets. Yet, it would be helpful to define liquid assets separately.
What are liquid assets?
Liquid assets are the ones that aren’t cash yet, but can be easily converted into cash, whenever required. If you have been investing in equities, you would know that you can sell and cash out in T+3 days (where T stands for the trade date). Most cryptos also offer instant liquidity. Even mutual funds can be sold to generate cash as required.
What are fixed assets?
Assets that cannot be easily converted into cash or even cash equivalents are termed fixed assets. In other words, these are resources with a life expectancy of more than a year, as is the case with current assets. Some of the more common examples include land, equipment, and buildings. However, fixed assets can be further divided depending on the type of asset.
For instance, land and buildings (real estate) are considered appreciating assets with the Indian real estate market forecast to grow at a 15% CAGR between 2022 and 2027, according to a report released by Mordor Intelligence.
Even gold and silver are fixed (tangible assets), which usually appreciate over time. However, if you plan on trading them as financial derivatives or commodities, they become financial assets.
However, equipment and machinery are subject to depreciation (losing value over time). Also, a vehicle purchased as a resource to reduce commuting expenses or travel time is a classic example of a depreciating asset.
What is an intangible asset?
If you own a business, you should be able to relate to this. Company trademarks, copyrights, patents, and even the goodwill generated can be termed intangible assets. They work as user-generating resources, have some economic value, and are mostly owned.
What is a financial asset?
Most investments are financial assets. These include corporate bonds, equities and crypto investments with a long-term vision, sovereign bonds, hybrid securities, and other financial instruments. Highly liquid financial assets can also be classified as current assets. Yet, your investing psychology has a role to play when it comes to defining the type of asset.
In case you plan on using financial assets as a long-term investment instrument, risk management becomes an important tool to consider.
Assets and liabilities are two sides of the same coin
While assets are something that you own, liabilities are what you owe to others. In fact, liability is the opposite of an asset. But practically speaking, we often refer to both in the same breath. Assets and liabilities comprise the right and left sides of any balance sheet. Knowing your assets and liabilities will help you plan your finances better. Finally, if we were to oversimplify, assets put money into your pocket while liabilities take it out.
In personal finance, categorizing assets requires a good understanding of the time horizon. For instance, current assets that are held for over a year turn into fixed/financial assets. Also, some assets appreciate while some depreciate, depending on market conditions and global sentiments. Once you get a grip on various asset classes, building a robust investment portfolio becomes easier.
Why are assets important in personal finance?
Assets are important in personal finance as they contribute to your net worth and financial stability. They can generate income, appreciate in value, provide financial security, and be used for future expenses or investments.
What is an asset and why are they important?
An asset is something of value that you own, such as cash, investments, real estate, or possessions. Assets are important because they contribute to your financial well-being by generating income, appreciating in value, providing security, and offering opportunities for future financial growth and stability.
What Are Examples of Assets?
Examples of assets include cash, savings accounts, investments (stocks, bonds, mutual funds), real estate, vehicles, valuable possessions (jewelry, artwork), business ownership, and retirement accounts (401(k), IRA).
What are the matters of personal finances?
Matters of personal finances include budgeting, saving, investing, managing debt, setting financial goals, tax planning, insurance coverage, retirement planning, estate planning, and monitoring and adjusting your financial strategies as needed.