What Are Assets?
If you thought that only the wealthy have assets, you’re about to become wealthy. Practically everybody owns assets—they’re nothing more or less than a thing of value that can be sold for cash.
What Is an Asset?
An asset is a possession that can be exchanged for cash. Your car is an asset, just like the money you hold in your checking account. That furniture in your living room? Even though your partner’s couch might not be your favorite, it’s still an asset.
“An asset is a thing that you own outright that holds value,” says Katharine Perry, certified financial planner (CFP) and financial advisor at Fort Pitt Capital Group. You can own an asset as an individual or jointly with someone else, like a parent, partner or spouse.
For a company, assets are considered to be anything that will provide it with a positive future economic benefit. This could mean equipment used in manufacturing or intellectual property such as patents.
The opposite of an asset is a liability, which is money you owe.
Types of Assets
While countless things can be considered assets, they don’t all fall into the same class. The four main types of assets are liquid assets, illiquid assets, tangible assets and intangible assets. We’ll also look at two additional types of assets that are important for businesses.
“A liquid asset is an asset that can be quickly and simply converted into cash while retaining its market value,” says Sara Rajo-Miller, investment advisor at Miracle Mile Advisors.
Examples of liquid assets include:
- Cash and Cash Equivalents. From the money in your wallet to the cash you have in your checking or savings account and even some certificates of deposit (CDs), these assets are ready to spend when you need them.
- Equities. These include shares of stock held in your favorite companies that can be easily sold on a stock exchange. Equities also include equity-centric mutual funds and exchange-traded funds (ETFs).
- Fixed Income. From several types of bonds to fixed income mutual funds and ETFs, these are easily liquidated for cash on exchanges similar to equities but also pay a fixed interest rate. Hence the name “fixed income.”
Illiquid assets are assets that cannot be quickly or easily sold for cash.
“If it takes longer than 90 days or you would need to sell it at a significant discount in order to convert it to cash, the asset would not be considered liquid,” says Jeffrey Wood, certified public account (CPA) and partner at Lift Financial.
Some examples of illiquid assets include:
- Antiques and Art. While many antiques are highly valuable, they take a specific kind of buyer to recoup their worth if you need to sell. Finding a discerning buyer for a painting or rare piece of furniture, for instance, could take an appraiser, broker and time.
- Collectibles and Sports Memorabilia. While invaluable to you, any kind of collectible or sports memorabilia has a defined market and audience. These audiences can drive an asset’s value up or down due to demand. Therefore, selling these types of items tends to take time and targeted marketing.
- Jewelry. While lovely to look at, jewelry generally takes time to sell at a fair market price. If you’re thinking there’s always the pawn shop, remember that they’re not exactly known for offering fair market prices to sellers.
- Real Estate. This includes your primary home, vacation homes and rental property. For businesses, it’s their office and warehouse space or retail storefronts. Depending on the market, real estate can take months to sell, making it a highly illiquid asset.
Tangible assets are assets you can touch. They can be either liquid assets, like the $20 bill in your wallet, or illiquid assets, like a vintage crystal vase or a ski cottage in Vail. Businesses would consider their land, machinery, office furnishings and supplies tangible assets. Even stocks and bonds are technically considered tangible assets because they used to be—and sometimes still are—issued with physical certificates.
If you guessed that intangible assets are assets you can’t touch, you’re on the right track. “An intangible asset is [one] that is not physical in nature and does not include liquid or illiquid assets,” says Rajo-Miller.
Much like tangible assets, intangible assets are most often referred to in the context of business. Think of them as the ideas that animate a successful business. Some examples of intangible assets include:
- Brand recognition and reputation. For a company or noted expert, their brand is a driving force behind revenue. As brand recognition increases and more good word is spread about a brand, the value in the marketplace increases.
- Intellectual property. Think about the Nike “swoosh” logo and the Apple’s iconic apple cutout. A logo or trademark can be an asset, along with any copyrights, patents or trademarks an individual or company owns.
Current Assets and Fixed Assets
While businesses have assets in all the categories above, there are two additional types of assets worth mentioning here: current assets and fixed assets.
- Current assets are any assets a company holds that it expects to use or convert to cash in the span of a single year or operational cycle. Think of a company’s current assets as things like inventory waiting to be purchased and shipped, the money that customers owe them, and cash or cash equivalents. The key to understanding current assets is that they’re held by the company for a short period of time and are not expected to appreciate in value over time.
- Fixed assets are assets a company owns that create other things of value and generate income. Assets in this class aren’t expected to be used up or spent in the short term. Think of them as long haul assets like machinery, delivery vehicles and real estate.
Why Do Assets Matter?
Assets matter because they are the tools you use to maintain and improve your standard of living—they sustain you through life’s challenges, and later in life you rely on them to retire, thanks to the proceeds they generate while you hold them.
Assets also matter because they let you determine your net worth, which is a measure of your personal wealth. You need to understand your net worth when applying for a mortgage or car loan or planning your retirement. And if you hit hard times, like a divorce or bankruptcy, you’ll need to know your net worth to have a clear picture of everything you own.
How Do You Determine the Value of Your Assets?
Asset value is calculated a few different ways. The discounted cash flow approach, the cost approach and the comparable/relative valuation approach are the most common, says Rajo-Miller.
Discounted Cash Flow Approach uses expected future cash flows to calculate an asset’s current value.
Cost Approach calculates value based on the cost of an asset or similar assets, plus the cost of any improvements to said asset minus depreciation, or the value it loses through age or use. This valuation method is primarily used for real estate.
Comparable/Relative Valuation Approach derives an asset’s value by comparing the asset to competitors or industry peers. For example, if you were considering buying a stock, you can compare its P/E ratio with other comparable stocks in the same industry to make a decision on whether you should buy it. This valuation method is primarily used for assessing businesses.
If you’re an average investor or consumer, though, Wood offers as easier way to determine the value of an asset: ”The biggest question that must be asked is ‘What is another person or company willing to pay for this asset?’” he says.
In that sense, then, the old adage rings true: What something is worth is what someone’s willing to pay for it when you’re ready to sell.
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