What are Assets?
Assets are anything that you own that have a cash value. Common examples are your house, car, stocks, business, cash, annuities, cryptocurrencies, and collectibles. On contrast to liabilities, they add to your net worth.
There are many different types of assets that you can own. Let’s look at the different common categories of financial assets.
- Financial assets are anything you own that has cash value
- Assets that appreciate in value are held as investments.
Cash and Cash Equivalents
Cash and cash equivalents include money in savings, checking, treasury bills and money market accounts. They are extremely liquid, stable, and generally safe but don’t produce much income as a result.
Properties of cash and cash equivalents
- Cash is the very definition of high liquidity.
- Cash equivalents generally provide little to no growth.
- They are very low risk.
- Hold only a limited amount of your assets in this class since growth potential is very limited.
Real estate is any land or building that you own. This includes your home, condo, land, and rental properties. Real estate generally appreciates over time at rates associated with inflation. It is a favorite asset class of millionaires with over 90% of them owning it.
Properties of real estate
- Moderately liquid. You can convert real estate to cash easily in the right market, but you may have to hold it for an extended period of time in certain conditions.
- Real estate provides low to moderate growth. It averages about 3% growth over the long term.
- Real estate is investments are moderate risk. They are backed by a physical property but due to economic conditions the property can lose value.
- It has carrying costs associated with it. You need to pay property taxes, insurance, maintenance, and transaction fees on the sale, which can greatly eat into your profits.
- Many Americans have a large percentage of their household wealth tied up in real estate.
Physical property includes most other non-investment assets you can own. Physical property includes everything from cars, boats, lawn mowers, art, baseball cards, guns, furniture, jewelry, and more. The majority of these assets depreciate, or lose their value, over time. The more money you tie up in these assets, the less you have for the more important asset classes, like investments and real estate.
Properties of physical property
- Moderately to highly liquid. You can generally sell these assets easily for cash.
- Can be anywhere from low to high risk, depending on the specific asset.
- You should limit your exposure to these assets as they typically depreciate in value.
- You often have to pay to maintain or store these assets. Insurance, taxes, maintenance, and storage can make these assets cost even more as they go down in value.
Investments are the most important asset class. They are generally risky but return the high rates as a reward. Investments can often grow at 10% a year, thought the expected return will be tied to the risk of the investment. They include annuities, bonds, cash value life insurance, mutual funds, pensions and stocks.
Properties of investments
- Can be low to high risk and higher risk is generally associated with a higher return.
- Investments generally grow in value over time, though they can lose some or all of their value under certain circumstances.
- You will typically held in accounts, such as a brokerage account, 401k, HSA,
Increasing your net worth always starts with acquiring financial assets. There are many different classes of assets that have different properties. A balanced portfolio will include assets from many different classes.
Concentrate on choosing investments that appreciate over time rather than spending on depreciating assets. Check out the Dollartrak App for a great way to see how they are distributed and project how they will affect your net worth going into the future.