What is an asset?
An asset is an item of property that has monetary value. Examples of an asset you might have are a house, vehicle, or cash.
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Types of assets
There are several major types of assets.
- Cash and cash equivalents. This is the money you have stored in your checking and savings accounts.
- Tangible assets. These are physical objects, such as your car, house, boat, art, jewelry and any business property owned in your name.
- Intangible assets. These are non-physical objects, such as bonds, stocks, royalties and your pension fund.
- Personal property. This is similar to tangible assets, including your house, collectibles, art, cars, etc.
- Investments. These are your interests in company holdings, such as stocks and mutual funds.
- Liquid assets. These are possessions you can easily convert to cash, such as tradable stocks. Selling liquid assets has little to no effect on their prices.
- Fixed assets. These are possessions that take longer to convert to cash, such as real estate and antiques. Fixed assets may change in price throughout the sale. They also are known as illiquid assets.
- Fixed-income assets. This is money you lend to banks and financial institutions in return for interest income. Examples of fixed-income assets include government bonds and securities.
Personal and business assets
Both individuals and businesses can own assets.
Examples of personal assets
Personal assets are owned by an individual or the household. They can be anything that has present or future value.
- Cash and cash equivalents
- Land or other property
- Personal property, like vehicles and collectibles
Examples of business assets
Business assets are possessions of value that help with the growth of a company. They include any plant and machinery, materials and inventory, and intangibles owned in the business’ name like patents or intellectual property (IP).
A business' assets are listed on its balance sheet. The balance sheet also shows how the business finances the asset, either by issuing equity or through debt.
The balance sheet consists of two types of assets: current assets and fixed assets.
Current assets are similar to liquid assets in that they can be quickly converted to cash within the financial year. Current assets fund the business' day-to-day expenses.
- Cash and cash equivalents
- Marketable securities
- Accounts receivable
Fixed assets are non-current assets. They have a life of more than one year, and the business uses them to produce its goods and services. Fixed assets also are known as tangible assets and are used for the long-term.
- Office furniture
- Plant and machinery
Note that noncurrent assets cannot be converted into cash easily, while current assets are expected to be liquidated within one fiscal year.
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Why assets matter
Assets help determine your net worth, which, in turn, indicates your progress toward reaching your financial goals, including buying a house or saving for retirement.
In an ideal world, your net worth should be increasing over time.
Here are some instances when it's particularly important to understand the scope of the assets you're holding.
- To calculate your net worth. Net worth is a measurement of your financial well-being. Your net worth equals your assets (what you own) minus your liabilities (debts). A positive net worth means the value of what you own is greater than the value of what you owe; a negative net worth indicates your liabilities exceed the value of your assets — meaning you're in debt.
- To determine how much insurance you need. Knowing the value of your assets is important so they're fully insured if they're damaged, if you fall victim to theft or fraud, or in the event of a fire or natural disaster. Some types of insurance — including disability insurance — also help protect your income, which many people often overlook.
- When you apply for a loan. Lenders tend to look at your liquid assets when you apply for a mortgage or other loan. The more liquid assets you have, the more likely you'll score lower interest rates, because you'll be able to fall back on your assets if you lose your job or source of income.
- When you need to present collateral. Lenders often require you to use an asset as collateral when you apply for a loan. That gives them something they can seize if you fail to repay the debt.
- When you go through a divorce. Your possessions may be split between you and your ex-spouse if you file for divorce.
- If you file for bankruptcy. You may have to give up assets to pay off debts when you declare bankruptcy.
- Once it's time for you to retire. Liquid assets are crucial for retirement. They help cover the cost of living once you’re no longer earning an income. Don’t forget that you may owe taxes when you sell liquid assets for much more than you paid; those profits are called capital gains.
Ultimately, you’ll want your assets and net worth to grow over time. The more you have, the healthier your finances now and in the future.
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