What are assets and how can they make you rich?
I’ve been an investment analyst for more than a decade and in investing, a company’s assets are a big part of how much the stock is worth. Assets are what the company owns and help make sales.
But assets are just as important in personal finance. In fact, understanding what assets are and the difference between assets and liabilities will make you rich.
Let’s look at a personal finance definition of assets, the types of assets you can use and how to be truly wealthy!
How Assets Make You Rich!
In investing, assets are anything a company owns that can be used to produce a product and profit. This includes inventory, receivables from prior sales, factories and patents. In personal finance, your assets include all your cash accounts, investments, real estate and even some of the things you own that might not create a return but are still valuable.
The other side of your financial health is liabilities, the money you owe on credit cards and loans.
In investing, you look at a company’s assets versus its liabilities. Having billions in assets doesn’t mean as much when the company owes tens of billions in debt. You get the same thing in personal finance.
You see this all the time, people with an amazing collection of assets. They might have a $40,000 Porsche and a home valued in the millions but how much do they owe on those assets? If they owe in liabilities as much as those assets are worth then they really don’t own anything.
So when you’re thinking about assets, understand that your net wealth is the value of your assets minus how much you owe.
Why You Should Start Owning Assets as Early as Possible
When you are first trying to save money, there are many different strategies that people use. This is exactly why so many people fail to actually do it. They don’t know what strategy is the best for them. This article will teach you about an easy way to store your money into something that will grow exponentially over time with little work after the initial setup of your portfolio.
First, let’s discuss why traditional savings accounts won’t cut it if you’re looking for somewhere safe to put your money away where it can grow. Essentially, savings accounts yield next-to-nothing in interest (when they even exist) because inflation is currently running at 2% or higher on average each year. The Federal Reserve states “the long-term potential rate of inflation is thought to be somewhere between 2.0% and 2.5%”. So, if you put your money in a savings account, let’s say a million dollars on January 1st one year from now, then the purchasing power of that account will have dropped due to inflation by some amount, even if it’s small. For simplicity’s sake, we’ll say it drops 4%. Now you are left with $960,000 instead of $1M because someone had to pay for that loss of value somehow.
Now that you know this, let’s talk about how owning assets will increase your wealth over time. Assets are things like property or stocks which generate revenue so more money can go into your pocket without more work on your part. Basically, you buy an asset and then as long as it is still around, that piece of property or those stocks generate money for you continuously. This means that your savings account will now grow with inflation, which is great! However, assets also grow faster than inflation rates so they can be a better option overall. So, if I buy a house 30 years ago which increases at a rate of 3% a year because the housing market has been going up consistently over time due to population growth and other things, after 30 years I will have 355% more purchasing power than someone who saved their entire life in a savings account could ever dream of.
So, what I’m saying here is that right now is the perfect time to start owning assets early on. If you are just starting out in life and you haven’t bought any assets yet, or own very little compared to what you could, then the best time to start is right now.
What are Your Assets?
You’ve got more assets than you probably realize.
First, there are your real assets like your home and your car. Those assets may not seem like they help make money but they certainly save you money in rent and versus taking public transportation.
The most obvious assets you own is the cash in savings and any investments in a brokerage account. Those stocks you own are an ownership piece of a company, hopefully a company that’s making money and paying you dividends.
One asset that most people overlook is their education and experience. In investing, we look at ‘intangible assets’ owned by a company. These are things like patents that have value and help produce a profit because customers will buy more of the company’s product.
In personal finance, your education is an intangible asset. It might not be a physical asset like a home or real estate but it helps you earn a higher wage.
Your personal finance assets include:
- Your home and any real estate you own
- Your car as long as you don’t owe more than it’s worth
- Cash and investments
- Anything you own and use to make money, i.e. a computer or home office equipment
- Your education
How to Use Asset Allocation to Grow Wealthy
Now that you know more about assets, you can start to come up with a plan to increase your personal finance assets and grow wealthy.
In investing, there’s a concept called asset allocation. It isn’t about analyzing a company’s assets but about investing in different asset classes from the investor perspective. Investors put their money in stocks, bonds, real estate and even peer loans to spread out their risk and have money coming in from different sources.
The idea is that when one asset isn’t producing a return then the others will be making money. For example, stocks do poorly during a recession but an investor will still make money if they have other assets like bonds and real estate.
You can use that same idea of asset allocation in personal finance.
Having all your money in one asset, maybe in your home, could leave you busted if home prices crumble. Spreading your money around in different assets though helps to provide a constant stream of return and make you wealthy over the long-term.
So how do you grow your assets?
- Budget and save money to invest every month
- Invest in your education by taking night classes or an online course
- Start a part-time business for extra income
- Pay half-payments on your mortgage twice a month instead of one full payment to pay it off faster
Remember, owning assets doesn’t mean anything if you owe money on them so don’t run out to buy an expensive house just to say you’ve got an asset. Focus first on assets that will help you make money like an education, investments and a side business. Stay on top of your liabilities by paying off the debt and watch as your assets make you rich.
Read the Entire Investing Series
- The 5-Minute Fix to Your Stock Portfolio
- 5 Monthly Dividends Stocks for Retirement
- What are Assets and How Do They Make You Rich?
- 6 Steps to Make Your Financial Assets Work Harder in 2021
- What is Compound Interest Investment? [How to Get Rich on Any Income]