What is an Asset?

When asked this question, people are confused between ‘possessions’ and ‘assets’. Your home, vehicle, jewellery are not assets. A good definition of the term ‘asset’ is something that has the ability to generate income. This is how a financially intelligent and knowledgeable person defines an asset. It is nothing but a personal possession that has an earning potential. That means income producing possession can only be referred to as an asset.

Income generating assets are valuable for your total financial health. When you talk about your net worth, it is most important to consider your earning potential i.e., your job. Robert Kiyosaki, a famous author says, “Financial independence is achieved when your monthly income exceeds your monthly expenses”. Income can be generated from two sources – one from your earning potential and other from the earning potential of your assets (possessions).

Based on behaviour and market valuation, assets are differentiated into various classes. These categories include equities (stocks, mutual funds), commodities (precious metals like gold, silver, agricultural produce), real estate (land, flats, rental properties), and fixed income (savings, fixed deposits, bonds).

Generally assets are grouped into two categories. Cash flow assets and growth assets. Cash flow assets are income bearing assets which include fixed deposits, high dividend stocks, some rental properties, interest bonds etc. These assets are purely income generating assets. Whereas growth assets are called as ‘appreciating assets’ which include commodities like gold and silver, growth stocks, and open land. Growth assets are focused on appreciation in value of assets. A good investment portfolio can be built with these two types of assets, which is a sure way to generate wealth.

At best home and jewellery are distress assets – things that can be sold in difficult situations for money. Many people overspend on their home assuming that it is an asset (instead of possession). The same home can bring a good rental income for the amount of investment because the tenant does not share the emotions of home ownership and looks for functionality at reasonable price.

Similarly, jewellery cannot be sold when the precious metal rates are high because of sentimental attachment. This again affects the ability to maximise gains.

Robert Kiyosaki mentions the big difference between the asset management of rich and poor. He says that the rich buy assets first and then use the income from the income generating assets to cover their liabilities, whereas poor buy liabilities first and then hope to buy income generating assets in the future. It becomes really difficult to generate income as you have already a big burden of debt.

Thus starting early in acquiring income generating assets is the easiest way to achieve high net worth. This can be possible if you invest your excess earnings in assets rather than possessions.