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What is an asset?
An asset is something you own that has monetary value, like a savings account or stock.
Taking inventory of your assets and knowing their worth is important. You may want to leverage some assets to achieve certain financial goals, or cover emergency expenses when they arise.
Assets can be personal or business-related, but we’ll focus on the personal use.
Types of assets
Assets fall into several categories, and some examples fit more than one description. Some assets depreciate (lose value), while others appreciate (gain value). Asset types include:
- Cash and cash equivalents: The money that’s in your pockets or stored in a savings account, checking account, certificate of deposit or other account.
- Tangible assets: These are physical objects, or the assets you can touch. Examples include your business property, car, boat, art and jewelry.
- Intangible assets: The nonphysical assets like stocks, bonds, pensions and royalties
- Liquid assets: Liquid assets are cash or the things that can be sold and converted to cash quickly, like readily tradable stocks and bonds. Selling these assets generally does not affect their price.
- Illiquid or fixed assets: Sometimes referred to as “fixed assets,” illiquid assets usually take longer to convert into cash, and their value may change in the process. Real estate, furniture and antiques are all considered illiquid or fixed assets.
- Fixed-income assets: Investment money that is lent for interest, including government bonds, certificates of deposit and securities.
- Equity assets: Your ownership interests in a company, like stocks, mutual funds and retirement accounts.
» RELATED: How to navigate equity compensation
Assets vs. liabilities
Assets are the things you own that grow your wealth. Liabilities are the debts you owe. Here are some examples of assets and liabilities:
| Assets | Liabilities |
|---|---|
|
|
Why assets matter
Your assets come into play when determining your net worth, or personal price tag. Ideally, your net worth should increase over time. Assets can also provide a safety net for financial emergencies and strengthen your borrowing power.
Here are some specific scenarios where you need to know your asset value:
- Net worth: Your net worth helps shape your financial health. You can calculate your net worth by subtracting your liabilities (what you owe, or your debts) from your assets (what you own).
- Insurance: You’ll need to know how much certain assets, like houses and jewelry, are worth to get them properly insured. Insurance gives you coverage in case of an event like a fire, storm or robbery, or potential liability, say if you’re sued after a car accident. Another asset people tend to overlook is their ability to earn an income. Consider protecting your livelihood with disability insurance.
- Loan applications: Liquid assets are often part of what lenders look at when you apply for a mortgage, car loan or home equity loan. You may get lower rates or better terms if you have money to fall back on to quickly make loan payments if you lose your job.
- Collateral: Some lenders require you to put your house or car up as collateral to receive a loan. If you do not repay the loan, these items may be seized to help cover the cost.
- Divorce: Your money and possessions may be divided up with your ex-spouse during a divorce.
- Bankruptcy: There’s a possibility that you’ll have to give up some assets, like jewelry or a car, if you file for bankruptcy.
- Retirement: Having a stockpile of liquid assets is crucial when you’re retired. It’s best to have money readily available to cover living expenses when you no longer receive a paycheck.
How to determine the value of your assets
The value of tangible assets like cars and antiques isn’t as clear cut as cash and cash equivalents; you can’t simply log in to an account and check the balance.
The original price you paid or retail price of an item can serve as a benchmark. To get a current value, get your property appraised by a professional or do your own assessment.
You can also work with a financial planner to get a clear picture of both your assets and your liabilities.
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