Personal Finance 101: What Is an Asset?

pf101When I’m writing about personal finance issues, I often use a subset of terms that, to me, feel like common sense. Stocks. Bonds. Savings. Frugality. These things all seem commonplace.

One word that’s nearly in that group for me is “asset.” It’s a simple term to describe a simple thing.

Which brings me to this email from “Jodie”:

You have mentioned assets in a few emails recently. What are assets? I’ve looked them up in Google but none of the definitions completely make sense.

In simplest terms, an asset is any item owned by you that has value. Your car is an asset. Your DVDs sitting on your shelf are assets. Your home is an asset. The money in your savings account is an asset. They’re all assets.

Usually, items that have a very direct and clear value are known as tangible assets. All of the items listed above are tangible assets. With a tangible asset, you can get a very realistic estimate of the value of the item and how much you can sell that item for to directly convert it into cash.

When people figure their net worth, they usually include their tangible assets on the positive side. Many people don’t count small tangible assets, such as individual DVDs or the used value of their refrigerator, when they do such calculations.

Most of the time, personal finance deals with tangible assets. However, there are also intangible assets, something I often touch on. Things like friendships, reputation, time, personal relationships, skills, talents, and other such attributes are intangible, but they clearly have value. You can’t put a precise dollar sign on any of these things, but they’re clearly assets.

Quite often, when investors discuss assets, they’re talking about things purchased for the primary purpose of generating a positive return, not necessarily for using them. They hope that when they buy this item, they can someday sell it for more than they purchased it for or earn enough income from the item that the total earnings and the sale price add up to a positive return.

Essentially, that’s how a savings account works. You put in $1,000 into an account that earns 1%. At the end of the year, the account has $1,010 in it. That $1,000 asset earned a $10 return over the course of a year.

Naturally, there are a lot of ways to put assets to work to earn a return. You can own some stock in a company that earns dividends, then sell that stock later on (earning a return on the dividends and a return on the sale). You can buy a house and the land it sits on, rent it out to people, then sell it later.

When people talk about asset allocation, they’re talking about owning a lot of different kinds of assets at once so that no matter what happens to the economy, they won’t go bankrupt. A person might own some U.S. stocks, some international stocks, some cash, some Euros, some gold, and some land as investment assets.

Good asset allocation means that if something bad happens in one area, like an economic downturn in the United States, you don’t significantly lose out with regard to the overall value of your assets. Obviously, asset allocation can be a very deep subject, indeed.

The idea of an asset is simple. It’s what people do with those assets that tends to sometimes get complicated.

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  1. Maureen says:

    I would say that your health is your most valuable intangible asset.

  2. Adam says:

    It’s difficult to talk about assets without juxtaposing with liabilities. Keep in mind that a liability, such as debt, can help create additional assets through leveraging.

  3. Eileen says:

    In finance (even personal finance), money in a bank account and stocks are intangible assets – assets that exist and have value but are not physical assets like a car or a house. Tangible assets are those that can be touched – they have a physical presence. Friendships, health, reputation – those are not generally considered to be assets in the financial sense. They have value but only to you – you might think of them as social assets. It’s an important distinction for someone trying to figure out their finances.

  4. Jake says:

    Trent, do you consider an iPhone an asset? Especially if it was subsidized and it’s worth twice it’s value in the open market?

  5. Tom says:

    “Jodie” should look up financial definitions on investopedia. It is a pretty good reference for beginners IMO.

  6. Ask says:

    A friend is a kind of help. Rain the life on the road, friends can block wind chill for you, for you share sorrow, remove the pain and difficulties, friends will always friendship.
    He is you climb up the escalator when you were injured, is a medicine, is you when a bowl of water of hunger, is when you across the river is the boat; He is money can’t buy orders not to come of, only the truly can track, and the most valuable for the real thing.

  7. I know a lot of people who invest in undervalued homes and sell them years later for huge amounts of profit — a great asset.

  8. Mark Gavagan says:

    Robert Kiyosaki (“Rich Dad, Poor Dad”) considers an asset as something that generates cash and a liability as something the consumes cash.

    While not technically correct, it is a great way of adjusting thinking when looking at “investments” like buying a house or rental property. If you are putting cash into a rental property every month, it’s not an asset in his view (of course somewhere down the road it might appreciate in price, but that’s not his point).

    -Mark Gavagan, author of “12 Critical Things Your Family Needs to Know”

  9. MattJ says:

    Maureen: Your health is only your most valuable asset if you’re healthy. If you’re not healthy, it can be a huge liability.

    Mark G: I would go further than you did when you called his definition ‘not technically correct’. It’s flat-out wrong. His attempt to redefine the word only muddies-up the water. He could just as well have distinguished between assets that bring in revenue and assets that cost revenue, without trying to claim that assets that cost money aren’t really assets.

    You and I both know that my home is an asset, despite Robert Kiyosaki’s assertions to the contrary.

  10. Diversification of asset is THE key to risk reduction and successfully building wealth. Studies show asset allocation determines the majority of portfolio returns!

  11. Dave says:

    To elaborate on MattJ’s comment, calling a rental home a liability because it consumes money confuses the fact the home is an asset with a corresponding with a corresponding liability (the mortgage).

    On the other hand, if the home is consuming money because it’s in need of repairs or maitenance, then there’s a good chance it’s a poorly thought out asset (meant slightly tongue in cheek).

    As an accountant, we always say “cash is king”, and the definition of an asset comes back to that. An asset is cash, easily converted to cash (CDs, easily sold items), or something to use to make cash (tools, a car to get you to work, a camera, etc).

  12. Kirk says:

    I think what Kiyosaki was getting at (and I am NOT a fan) is that many things we think of assets hamper us. A car is an asset, but we all know that if most people think of it this way, they will overspend on it, thinking they have something of value. We know that the asset of that car is mainly what it can do for us (get us places) and it will have a diminished value (if any) when we choose to dispose of it. So I think it is good for a lot of people struggling with the concept of assets to at least understand where Kiyosaki and others were coming from.

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