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What Are Assets and Why Are They Important?

Last updated 03/15/2024 by

SuperMoney Team
Summary:
Assets are resources that have value and can be owned or controlled to generate economic value. The main types of assets include liquid assets like cash and savings accounts, fixed assets like real estate and equipment, financial assets like stocks and bonds, and intangible assets like patents and brand recognition. By diversifying across different asset classes and balancing risks and returns, individuals can build a well-rounded investment portfolio that can help them achieve their financial goals over the long term.
When it comes to personal finance, understanding the concept of assets is crucial. Assets are anything that you own that has value, and they can include things like cash, investments, real estate, and personal property.
But why do assets matter, and how can they impact your financial well-being? In this article, we’ll explore the importance of assets and the different types of assets you should be aware of.

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What are assets?

Assets are anything you own that has value. This can include cash, investments, real estate, business ownership, personal property, and more. Essentially, assets are anything that can be converted into cash and can potentially generate income or appreciate in value over time.
For example, if you own a rental property, that property is an asset because it has value and can generate income through rent payments. Similarly, if you own stocks or mutual funds, those investments are assets because they have value and can appreciate in value over time. You can also earn an income from these investments through dividends or capital gains.

What are liabilities?

Liabilities are, essentially, the opposite of assets. They’re obligations or debts that a company or individual owes to others. The difference between a company’s assets and liabilities is its equity or net worth.

Why are assets important?

Assets are important for several reasons.
  • Build wealth. By accumulating assets over time, you can increase your net worth and improve your overall financial position. This can give you greater financial stability and provide a sense of security for your future.
  • Generate income. Many assets, such as rental properties, stocks, and bonds, can provide regular income through rent payments, dividends, or interest payments. This can be a source of passive income that can help you achieve your financial goals and build wealth over time.
  • Diversify your portfolio. By owning a mix of different assets, you can spread your risk and potentially reduce the impact of market downturns or other financial setbacks. This can be an important strategy for managing risk and protecting your wealth over the long term.
  • Prepare for the future. By accumulating assets, you can build a financial cushion that can help you weather unexpected expenses, job losses, or other financial challenges. This can give you greater peace of mind and reduce your financial stress in the face of uncertainty.
Overall, assets are an essential part of any sound financial plan. By understanding the importance of assets and the different types available to you, you can make informed decisions about how to manage your finances and build wealth over time. If you need some additional help managing your wealth, take a look at some of the service providers below.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Types of assets

There are several different types of assets, each with its own unique characteristics and advantages. Here are the main categories of assets you should be aware of:
  1. Liquid assets. Liquid assets are assets that can be easily converted into cash without significant loss of value. These include cash, savings accounts, money market accounts, and certificates of deposit (CDs). Liquid assets are an important part of any emergency fund or cash reserve, as they provide quick access to funds in case of unexpected expenses.
  2. Fixed assets. Fixed assets are long-term assets that generate income or value over time. These include real estate, machinery, equipment, and vehicles. Fixed assets can appreciate in value over time and provide a steady source of income through rent, leasing, or other revenue streams.
  3. Financial assets. Financial assets are assets that derive their value from a contractual claim, such as stocks, bonds, and mutual funds. These assets can generate income through dividends or interest payments and can appreciate in value over time.
  4. Intangible assets. Intangible assets are non-physical assets that have value, such as patents, trademarks, copyrights, and intellectual property. These assets can be an important part of a company’s overall value and can be used to generate income through licensing or other revenue streams.

1. Liquid assets

Liquid assets are assets that can be easily converted into cash without significant loss of value. These include things like cash, savings accounts, money market accounts, and certificates of deposit (CDs). Here are some key things to know about liquid assets:
  • Cash reserves. Cash is the most liquid asset, and having a cash reserve is essential for financial security. Experts recommend having at least three to six months’ worth of living expenses in a cash reserve to cover unexpected expenses or emergencies.
  • Low risk, low return. Liquid assets are generally considered to be low-risk and low-return investments. They provide a safe place to park your money, but generally offer lower returns than other types of assets like stocks or real estate.
  • Interest rates matter. While liquid assets may offer lower returns than other types of assets, it’s still important to pay attention to interest rates. By shopping around for the best rates on savings accounts, money market accounts, and CDs, you can potentially earn higher returns on your liquid assets.
  • Inflation risk. One of the main risks of holding liquid assets is inflation risk. If the rate of inflation is higher than the interest rate on your cash or savings account, your purchasing power can erode over time. To combat inflation risk, consider investing some of your liquid assets in those that have the potential for higher returns, such as stocks or real estate.

2. Fixed assets

Fixed assets are long-term assets that generate income or value over time, such as real estate, machinery, equipment, and vehicles. Here are some key things to know about fixed assets:
  • Appreciation potential. One of the main advantages of fixed assets is their potential to appreciate in value over time. For example, real estate prices can increase due to factors like population growth, gentrification, or infrastructure improvements. By investing in fixed assets with strong appreciation potential, you can build wealth over time.
  • Cash flow potential. Fixed assets can also provide a steady source of income through rent, leasing, or other revenue streams. For example, a rental property can provide rental income each month, while a piece of machinery can generate revenue through production or manufacturing.
  • Management and maintenance. Fixed assets require ongoing management and maintenance to ensure their value and income potential are maximized. This can include tasks like repairs, upgrades, and tenant or customer management. It’s important to factor in these costs when considering fixed-asset investments.
  • Risk and liquidity. Fixed assets generally come with more risk and less liquidity than liquid assets like cash or stocks. These assets are also more susceptible to market fluctuations or other external factors.

3. Financial assets

Financial assets are assets that derive their value from a contractual claim or ownership right. These include things like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Here are some key things to know about financial assets:
  • Diversification potential. Financial assets offer investors the potential for diversification, or spreading their investments across different asset classes, sectors, and geographies. By investing in a mix of stocks, bonds, and other financial assets, investors can reduce their exposure to any one company, sector, or market.
  • Volatility and risk. Financial assets can be volatile and carry risks like market risk, liquidity risk, and credit risk. The value of stocks, bonds, and other financial assets can fluctuate rapidly based on factors like economic conditions, company performance, and interest rates.
  • Potential for returns. Financial assets offer the potential for higher returns than liquid or fixed assets but also come with greater risk. Stocks, in particular, have historically provided the highest long-term returns of any asset class. However, past performance does not guarantee future returns, and investors should be prepared for the possibility of short-term volatility and losses.
  • Active vs. passive management. Financial assets can be actively managed, where a professional portfolio manager makes investment decisions on behalf of investors. They can also be passively managed, where investors invest in an index fund or ETF that tracks a specific market or asset class. Active management tends to be more expensive but may provide better returns, while passive management tends to be cheaper and more predictable.
But before you start investing in this asset class, you’ll need a brokerage account. Take a look at some of the brokerages below to get started.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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4. Intangible assets

Intangible assets are assets that don’t have a physical presence but have value because of the rights or privileges they confer. These include patents, trademarks, copyrights, goodwill, and brand recognition.
  • Value and competitive advantage. Intangible assets can be a source of competitive advantage for companies because they confer rights or privileges that competitors don’t have. For example, a patent gives a company the exclusive right to make, use, or sell a product or process for a certain time. Brand recognition and goodwill can also give companies a competitive edge by building customer loyalty and trust.
  • Difficulties in valuation. Intangible assets can be difficult to value because they don’t have a physical presence, so their value can be subjective. Valuing intangible assets typically requires the use of complex models and assumptions about future cash flows, market trends, and other factors.
  • Protection and management. Intangible assets require protection and management to ensure their value is maximized and that competitors don’t infringe on their rights. This can include tasks like applying for patents, trademarks, or copyrights; monitoring competitors for infringement; and building and maintaining brand reputation and customer loyalty.
  • Long-term value. Intangible assets can provide long-term value for companies and investors because they can generate revenue and profits over an extended period of time. For example, a patent can provide a company with a monopoly on a product or process for up to 20 years. On the other hand, brand recognition and goodwill can generate customer loyalty and repeat business for decades.
By diversifying across different asset classes and balancing risks and returns, individuals can build a well-rounded investment portfolio that can help them achieve their financial goals over the long term.

Key Takeaways

  • Assets are resources that have value and can be owned or controlled to generate economic value.
  • The main types of assets include liquid, fixed, financial, and intangible assets.
  • Diversifying across different asset classes and balancing risks and returns can help individuals build a well-rounded investment portfolio.
  • Assets are a critical component of financial planning and can help individuals build wealth, manage risk, and achieve financial security.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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