What Is an Asset?
In personal finance, an asset is anything you own or control that produces economic value, future profits, or positive cash flow. Assets broadly differ in form and can be tangible (touchable) or intangible (untouchable). However, as long as it is producing positive economic value, it is considered an asset. The key takeaway is that an asset makes you money while a liability drains your wallet.
What Is a liability?
It is crucial to understand and avoid liabilities because of their financially damaging effects. A liability is any form of money you owe to another person or institution, including credit card debt, personal loans, mortgages, car loans, student loans, etc. Liabilities are financial strains that pull money out of your account and put it into someone else’s. In addition, the fewer liabilities you have, the more assets you can own.
Why Are Assets Important?
Assets are essential tools for building wealth for two reasons, appreciation and cash flow. Appreciation occurs when the value of something you own increases. The process of appreciation is typically gradual, happening over several years. Real estate is an excellent example of an asset that can appreciate as the housing market increases. Cash flow, however, can happen at a faster rate than appreciation. Cash flow occurs when an asset is producing regular profits, typically calculated monthly. An example of a cash-flowing asset would be owning a commercial building and renting it out to a business. The monthly rent payments the company makes to you would be profits after all property expenses are deducted. Owning assets will increase the velocity of your money and your net worth.
There are a few prominent misconceptions about what is considered an asset that needs to be covered. For example, it is common for people to claim that their house is an asset. Although real estate investing can be a great asset, this does not mean that getting a mortgage to obtain your primary residence is one. Technically, the bank owns the house until you pay them back with interest. In addition, many people use a large chunk of their paychecks to keep up with the mortgage payments. In this example, the house is more of a liability than an asset.
Examples of Assets
Below are some excellent examples of assets that, by possessing, can significantly build your wealth.