Types of assets: What are they and why are they important?
Know what types of assets you have help in determining your wealth.
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An asset is something that you invest in that has a monetary value. Stocks are one example of an asset, but so is your house and savings account. Assets can even be intangible, like property rights.
On the other hand, a typical life insurance policy is not an asset. Neither is property you don’t own, like an apartment you rent or car you lease.
Every asset has a rate of return and the potential to generate more money in the future, unlike its opposite, a liability. A liability is something that you owe, like a financial debt.
There are also business assets and personal assets. Business assets are simply used for your business and can sometimes be written off as an expense.
Types of assets can be categorized the following ways:
Tangible vs intangible assets
Current vs fixed assets
Operating vs non-operating assets
Knowing what types of assets you have is important in determining your worth. This can be equally useful for business purposes or personal accounting, whether you’re planning for retirement, or a divorce and need to divide up your assets. The worth of your assets will also come in handy when you’re applying for a loan or filing for bankruptcy.
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Appreciating versus depreciating assets
All assets depreciate or lose value once you purchase them, while others gain value, or appreciate.
The most common examples of depreciating assets are cars and vehicles, since these lose value as soon as you start driving them. Regarding business assets, machinery and equipment are also considered to be depreciating.
Appreciating assets on the other hand have the tendency to gain value. These include real estate, precious metals, stocks and bonds.
Classifying your asset types
The different categorizations of asset types offers you different ways of assessing and understanding them. If you think you don’t have any assets, think again. Even if you haven’t bought a home, you probably still have a handful of financial assets.
Financial assets
A financial asset is one whose value is based on a contractual right or ownership.
Common examples of financial assets are:
Cash and cash equivalents, like a checking or savings account
Bonds
Stocks
Mutual funds, also known as money market funds
Financial assets, and all other assets can further be classified according to these categories:
Physical existence
Convertibility
Usage
Physical existence
One way to categorize your asset is whether or not it is tangible — or can be physically perceived or touched.
Tangible assets (also known as real assets)
Cash and currencies
Real estate and land
Houses and cars
Equipment, machinery, office supplies (important if you’re a business)
Artwork and collectibles
Precious metals or coins
Intangible assets
Patents and copyrights
Trademarks and trade names
Franchise or lease agreements
Intellectual property
Accounts receivable
Convertibility
Convertibility is a measure of liquidity, or how quickly you can generate cash. Current assets can easily be converted into cash, usually within a year. Non-current assets take a bit longer, which is why they’re also called long-term assets.
Current assets
Most financial assets like cash (or cash equivalents), stocks, bonds and mutual funds, fall under this category. Inventory and prepaid expenses are also important current assets for businesses, as well as accounts receivable. This is money owed that is owed to you and is usually generated as an invoice.
Fixed assets
Real estate or land
Buildings, machinery, equipment
Patents and trademarks
Usage
Businesses typically use this categorization to distinguish between operational assets and non-operational assets.
Operating assets are used on a daily basis and necessary to the generation of revenue. Operational assets would include cash, machinery, equipment, patents and copyrights
Non-operating assets are anything that is not employed in the daily functioning of a business. This might include any short-term investments or land or real estate that is currently not in use.
Diversification of assets
It’s important to diversity of your assets when it comes to investing. For example, if you have an IRA account with long term retirement goals, you might invest 90% in securities, and 10% in bonds. The low risk of bonds are meant to weather any losses from the higher-risk securities.
However, diversification doesn’t only apply to retirement or investment accounts. It also applies the broader spectrum of assets you might own. For example, you might not want to put all your money in just one savings account or invest it all in bitcoin.
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Elissa Suh
Personal Finance Editor