What is an Asset?
An asset is anything with monetary value that is owned by a person, company, or government. Assets are acquired through financial transactions and have a probable chance of creating a future economic benefit to the owner.
In personal finance, an asset increases the owning individual's net worth by the asset's value. For example, if an individual gains ownership of a house appraised at $100,000, then their net worth would increase by $100,000, as that house is an asset.
Detailed Look at Assets in Personal Finance
Personal assets include everything that a person owns or is owed to them. Assets include the total value of the following:
- Savings accounts and checking accounts
- Retirement and brokerage accounts
- Real estate
- Debt owed to the individual
- Businesses owned in part or in full
- Personal property that can be appraised and easily sold off if needed
- Cash and cash equivalents
The sum of all of an individual's assets is added to their net worth.
Some types of assets gain value, which is said that the asset appreciates. Conversely, other types of assets lose value, which is said that the asset depreciates.
Types of Assets
In personal finance, there are several types of assets. Some assets can be categorized in multiple ways.
Cash and Cash Equivalent
Cash and cash equivalent assets are the money you have at home or in your bank accounts, which includes money stored in a checking account, savings account, certificate of deposit (CD), money market account, and similar bank accounts in which you can access the money easily.
A fixed asset is also known as an “illiquid asset” as it takes longer for them to be converted into cash. Additionally, fixed assets may change in value when they're converted to cash. For example, real estate is considered a fixed asset because it takes time to buy and sell real estate, and the exact value may not be known until the sale price is agreed upon before the transaction is made.
Liquid assets are assets that can be converted to cash relatively quickly, such as stocks and bonds. When you convert liquid assets to cash, the value generally doesn't change, such as when you sell a stock for its current value.
An intangible asset is an asset that isn't physical. This includes stocks and bonds as well as trademarks and intellectual property.
Tangible assets are physical assets. These types of assets include your home, car, furniture, jewelry, and anything else that you own that you can touch.
A depreciating asset is an asset that loses value over time. For example, most cars and computers lose value over time, and these would be considered depreciating assets.
An equity asset is an asset that represents your ownership in a company. For example, a stock that you own is an equity asset, as this grants you an ownership interest in the underlying company.
Why Do Assets Matter
Your assets are part of your net worth. Net worth is calculated by summing up the value of your assets and subtracting the value of your liabilities.
Here are some reasons why you'll need to know the value of your assets:
Determining How Much Insurance You Need
When you insure something such as your house, you'll need to know how much your house is worth so that you can get the correct amount of insurance. In addition, some insurance policies require you to add additional coverage for specific personal property, such as a computer worth over a specified amount of money. In that case, knowing the value of your computer, an asset, will help you determine if you need additional coverage.
Applying for a Mortgage
A mortgage is generally one of the most significant loans you'll take in your life, and you may need to show your account balances to help them determine if you have backup funds in case you lose your income temporarily. Having ample liquid assets can help you get a better rate and terms when you apply for a mortgage or other major loan.
Collateral for Loans
You may be required to put up assets such as your home as collateral when taking out some types of loans. If you stop paying, this protects a lender, as they may seize your collateral to make up for the money owed.
Reaching Financial Goals
If you're planning a major purchase or a big trip in the future, it helps to know the value of liquid assets that you might sell to pay for these goals. For example, you might determine that you need $10,000 for a trip around the world with your spouse, and to raise that money, you might choose to invest in an index fund. You could allow your money to grow until the value of the index fund you continually invest in reaches $10,000. From there, you sell your shares to fund your goal of traveling around the world.
Figuring Out Your Net Worth
The sum of your assets minus the sum of your liabilities determines your net worth. Your net worth is an indicator of how financially healthy you are.
How Easily You Can Cover an Emergency
Knowing the value of your assets, specifically your cash and cash-equivalent assets, can help you determine how well you can handle an emergency, such as a trip to the emergency room not covered by insurance. When you have more cash and cash-equivalent assets, you're more cushioned from a mishap which will help mitigate the need to go into debt to pay for incurred expenses.
When You Can Retire
Knowing the value of your liquid assets can help you determine when you'll be able to retire. You'll need ample liquid assets to live off of once you stop receiving a paycheck from work.
How To Tell If Something Is An Asset
An asset is something you own or is owed to you. For example, your furniture, car, house, and belongings are all assets, as is the money in all of your bank and investment accounts. Additionally, any money owed to you is considered an asset. If your best friend owes you $100, then that $100 is an asset that can be added to your total assets.