Understanding Your Assets and Knowing How To Use Them

Knowing your assets is not just useful--it's essential for achieving full financial stability. It could someday save you from financial strife. Here's how to know what you're looking at, what it's really worth, and how to get the most out of your assets.

The wealthy aren’t the only ones with assets. Technically, anything of financial value is considered an asset, so you may be much richer than you think right now!

As noted by Forbes, “practically everybody owns assets—they’re nothing more or less than a thing of value that can be sold for cash.” If you own a car, for instance, it’s considered a personal asset. For a company, however, what defines an asset adds up a little differently.

Textbook Definition

An asset is any resource owned or controlled by an individual, company, country, or economic entity. The term “resource” is defined pretty broadly. In matters of business, anything providing economic benefit presently or potentially in the future is filed as an asset.

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Because so many things could fall under this wide-reaching umbrella, assets are typically divided into four primary categories–plus subcategories worth noting. It’s a lot to take in, but we’ll break everything down into manageable pieces.

What Are The Main Types of Assets?

The primary types of assets are liquid, illiquid, tangible, and intangible assets.

A liquid asset is perhaps the easiest asset to unpack. Anything that can be easily, securely, and quickly exchanged for cash is a liquid asset. However, it must be something that retains its market value after being converted.

As the name implies, illiquid assets function in an opposite manner to liquid assets. An illiquid asset cannot be quickly converted into legal tender. Some of this comes down to timelines. If it takes longer than 90 days to sell, it cannot qualify as a liquid asset. Furthermore, if its worth is not universally recognized or requires a specially trained eye to assign value, it is also considered an illiquid asset. Examples include art and antiques, jewelry, collectible items, and real estate.

Assets are also broken down by what you can touch and what you cannot. Tangible assets can be liquid or illiquid, but they must be things you can physically get your hands on, like a hundred-dollar bill, an autographed baseball card, or a jet ski. A business would consider its supplies and machinery tangible assets. If the land was owned by the company, it would count as a tangible asset as well.

Intangible assets also entail what their name directly implies. These assets include things that cannot be physically handled. Intangible assets most often come into play within the business realm. For instance, a company’s brand is an intangible asset and so is intellectual property, like a company’s logo. Intangible assets are tough to value and sell, so they’re in a special category outside the liquid/illiquid domain.

In addition to these four primary types, there are two more categories of assets important to understand, especially in matters of business.

Current Assets Vs. Fixed Assets

Current assets are defined as any resource a business plans to employ or convert into funds in the span of one year or operational cycle. In other words, they are being assessed as cash equivalents. These assests are going to be used, not merely kept as investments. The most defining quality of a current asset is that they’re only held onto for a temporary period and not expected to grow very much in value, if at all.

Fixed assets stay put for the long haul. These are anything a company owns that can produce more valuable entities or generate ongoing income. Unlike current assets, they’re geared more towards the big picture and not used quickly.

Why Assets Are Important in Personal Finance

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Assets aren’t just financial cushions; they are useful tools to maintain and/or improve your quality of life and sense of financial stability. Those planning to retire often turn to their assets first. Ultimately, assets matter because of their obvious financial benefits when cashed in, but they can also help you improve your current financial standing. In other words, assets can level the playing field and get you where you want to be.

As noted by Runny Mede Trust, “assets also matter because they let you determine your net worth, which is a measure of your personal wealth.” When making future plans, like applying for a mortgage or your retirement, you’ll need to understand your net worth to efficiently put that plan into action.

The same will be true if you run into financial hits or hardships. If you find yourself dealing with things like a divorce battle or bankruptcy, it’ll not only be useful to know your assets well, but it will likely prove necessary. Get all of your assets clearly in order sooner rather than later. You never know when you might need to prove your net worth!

Ultimately, organizing your assets helps you better prepare for a more financially stable future, no matter what.

Why Asset Management Matters in Business

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Asset management is a useful practice for individuals, but it’s especially crucial to the success of a company. To figure out if something is a business asset is simple. Ask yourself this question: Can it generate cash flow in the future in any way? If the answer is yes, it’s an asset.

As noted by Investopedia, “assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations.” In other words, they’re definitely worth keeping track of.

For any business, keeping track of assets is an important step toward saving money and time. Asset management is the process of maximizing a company’s resources in an effort to provide the best returns. As previously mentioned, businesses have a wide variety of assets that fall into all asset categories. Successfully making use of them will require knowing what they’re really worth and in what hierarchy. In turn, asset management is critical to making the best of each resource in immediate, long-term, and value-maximizing ways.

Most times, asset management is also key when it comes to asset recovery. Asset recovery (aka investment or resource recovery) involves maximizing the estimated value of unused assets through effective reuse, etc. In turn, it’s extremely important for a company to know what they have, where it’s located, what’s missing, and how to best make use of those unused assets moving forward.

Overall, assessment management leads to a more efficiently operating organization. Asset management allows businesses to readily understand how far their assets can really go and where they’ll reap the most benefits in the grand scheme of things.

Determining Your Assets’ Value

There are numerous ways asset value is calculated. Financial experts say the discounted cash flow approach, the cost approach, and the comparable/relative valuation approach are by far the most common strategies for sorting assets out.

Discounted cash flow (DCF) is a method that uses expected future cash flows to estimate an asset’s current value. The cost approach is a calculation based on asset’s or type of asset’s cost, based on a variety of factors including depreciation and demand. Typically, this valuation method is applied to real estate assets.

Last but not least, there’s the relative valuation approach to consider, also referred to as comparative valuation. And it’s incredibly useful. It involves using similar and comparable assets to assess the worth of an asset. This method comes most in handy for assessing businesses, especially when evaluating the value of other stocks.

Understanding Asset Rights

In business matters, an asset is defined as an economic resource or anything representative of exclusive access for and by the company it belongs to. In turn, rights to those assets are legally enforceable, and how often they’re used is fully up to the company, and so is divvying out use to others.

For something to qualify as a company’s asset, the organization must have a legal right to it. Economic resources are just as sought after as they are scarce. Because assets can produce economic benefit, those who hold true assets hold power.

For individuals and businesses, an asset is something owned by you or something that is owed to you. No matter your financial situation, if you’re looking to increase your assets, it might be time to start investing. But before you do that, familiarize yourself with the best income-growing assets around.

Some may already be well within reach.

Growing Your Wealth Through Your Assets

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Assets

Income-producing investments owned by a business, institution, or individual are called “earning assets.”

These unique assets have a base value and can produce growing funds beyond their inherent value. In turn, the investment holder is able to maintain the assets as an income source or sell off the assets for their present worth. This is why stocks qualify as liquid assets.

In addition to stocks, earning assets include bonds, rental property income, certificates of deposit (CDs), and other dividend earning accounts. They allow anyone to grow their wealth by providing a steady income, and they’re instrumental for many when working towards their long-term goals, like maximizing retirement funds and minimizing income taxes.

A quick note: There is a certain amount of maintenance involved. Expect routine costs (such as taxes and utilities) related to the maintenance of these assets. The good news is, many could also qualify as tax deductions. For instance, rental properties will require utility payments, but repairs to the property may qualify as a deduction.

Last but certainly not least, never underestimate the value of asset accumulation. Whether you are building wealth over time by earning, saving for retirement, or investing money to see what could happen, watching your assets grow can be extremely rewarding and well worth the wait. 

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