Personal Finance 101: What Is an Asset?

Personal Finance 101: What Is an Asset?
  • Opening Intro -

    One of the most important aspects of personal finance is setting up a budget.

    Part of that process is identifying household assets and liabilities.

    Many people, however, are unaware of what exactly constitutes an asset, and are unable to plan accordingly.

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By John Smith
This article will help identify assets and explain their importance for home budgets.

Assets Defined

An asset is anything that you own and that has value. For most people their largest assets might be a car or home. (Having a mortgage on a home or a car loan still makes them an asset, although the value of the mortgage or loan is subtracted as a “liability” on a personal valuation.) One question to ask when determining whether something is an asset is to ask, “Could I sell this item?” A bed is an asset because it could be sold. An apartment is not an asset because the renters do not own the property, and thus they could not sell it to a buyer.

Assets can be further classified into appreciating or depreciating assets. Appreciating assets are those whose value increases over time. Real estate is usually an appreciating asset because it can be sold later for a higher price than when it was purchased. Depreciating assets are those that lose value over time. Cars are a classic example of depreciating assets — a used car is worth far less than a new car of the same model, because they become less valuable over time. Some assets may fluctuate in value. For example, a stock portfolio may be worth far more or far less than its initial value depending on market conditions. In this case it is difficult to classify investments into depreciating or appreciating assets.

Tangible vs. Intangible

All of these examples have dealt with physical items that can be bought or sold. However, there are many things in our lives that have value but cannot be purchased. Our friendships, marriages, or community relationships are very valuable to us but they do not have clear market values. These items can be considered “intangible assets,” although they are not assets by definition — we do not “own” relationships or communities, and those relationships cannot be bought or sold. Physical items — such as cars, lawnmowers, appliances, or real estate — are “tangible assets.” Because they are real objects they can be easily owned and sold.

Finally, personal finances require assets to be offset by “liabilities.” Assets are what we own, but liabilities are what we owe to others. A mortgage or car loan are liabilities because the owners are liable for their payments. When considering someone’s net worth, accountants will calculate both what the person owns and what they have to pay off. Suppose someone owns a $5 million company but owes $4 million to creditors. If he sold the company he wouldn’t pocket $5 million — he has to pay off the creditors first. His net worth would therefore only be $1 million. In calculating net worth it is important to consider both assets and liabilities to get a full picture of someone’s real worth.

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Categories: Money Management