Welcome back to the Things I Think About Blog. This week I am going to talk about what assets are, with regards to personal finance.
“as·set /ˈaset/ noun
General Definition
a useful or valuable thing, person, or quality.
property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
military equipment, such as planes, ships, communications and radar installations, employed or targeted in military operations.
Accounting definition.
Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.”
The definition we are going to focus on is “Property owned by a person or company…”.
Depending on how you look at things, you can call almost any property an asset. But the real question is will it make you profit? Does it earn you more money than it costs to keep it or can you sell it for more than you paid or are paying for it?
A phrase you will hear people say is that “your home is your biggest asset”. It can be, but only in specific situations. You can have a large percentage of equity in your home, meaning the difference between what you home is worth versus what you owe on it, but you will only realize that equity if you either sell the property for a gain (if it has appreciated since you bought it), or if you refinance it and harvest the equity, then use that money to invest in something that will make you profit.
While I don’t have the numbers to back it up, I would bet that a lot of people are not in that situation.
Robert Kiyosaki even goes as far as to say that your home is never an asset because it is never bringing in cash flow. He makes the case that overall, you are better off renting and letting someone else worry about repairs, taxes, homeowner’s insurance, etc.
Personally, I tend to agree with him on that front, but I feel that if your goal is to own a home, then you figure out how to make that happen. Make investments that pay for the home you want.
Stay away from buying property that does not bring you profit…like boats, RVs, ATVs, etc. You do not need to spend all kinds of money on shiny objects, especially if they will not make you a profit.
While we are talking about assets or not assets, let’s look at buying a car.
Here in the USA unless you live in a larger metropolitan area, you need a vehicle to get around.
If you are in that situation, remember this interesting statistic, that new cars lose approximately 11% of its value. or what you paid for it, as soon as you drive it off of the lot.
Let’s look at this scenario, you buy a $25,000 car and you are able to get 1.9% financing through the dealership. Taking into account the “drive-off depreciation”, your first 8 car payments will be used to pay off that depreciation. Additionally, it will take another 6 months of payments to cover the rest of the first year of depreciation for that new vehicle.
You would be much better served buying a slightly used vehicle and saving the extra costs associated with buying a new one.
Invest in things that will make you money. Invest in things that provide cash flow. Don’t speculate on appreciation.
And, as always, let me know what you think in the comments. Ask questions, tell your story.
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