Finance Definitions: What is an Asset?

Finance Definitions: What is an Asset?

You know our mantra -- knowledge is power when it comes to your finances, and you can't be in the game unless you know the lingo. We hear the words "asset," "liquid asset," and "depreciating asset" thrown around a lot -- now's the time to get a handle on exactly what those terms mean.

We all have a vague idea of what makes something an asset, but looking in more detail at the word can help us make wiser financial choices.

What Exactly IS an Asset?

The key component to something being an asset in your financial life is that it has exchange value. Basically that means: Could you sell it? This is why your house or your car is typically viewed as an asset -- and your shoe collection not so much. While you could sell your car or home relatively easily, your ability to sell your shoes is pretty limited -- and you won't be able to get anywhere near what you spent on them.

Liquidity and Depreciation

Keep in mind, however, that even if you have salable assets, their liquidity and depreciation levels will make a big difference in how valuable they are to you.

"Liquidity" refers to your ability to extract the value from your asset. Basically, how quickly can you sell it? Cash is the ultimate liquid asset, and stocks and bonds are typically viewed as very liquid as well -- stock markets are usually open and it's pretty easy to figure out what your stocks are worth.

However, a rare coin collection will, for most people, be considered an illiquid asset. Only a certain number of people are going to be interested in buying your collection, and what they're willing to pay will probably vary greatly.

"Depreciation" refers to whether the asset typically loses value. A car is a perfect example of a depreciating asset. As soon as you buy your car, it's quickly losing value. In contrast, your house is usually an appreciating asset. Over time houses tend to go up in value.

We'll look at these concepts in more detail in later posts, but they are two of the most important attributes of assets.

The Worst Kind of Assets

This of course brings us back to our shoe collection. It is, in many ways, the worst kind of asset. It's illiquid and rapidly depreciating. Once you've bought the shoes, they're going to be hard to sell. They'll be even harder to sell the more you wear them.

This is the problem with purchases of consumer goods like shoes and televisions. Compared to buying something that (hopefully) holds its value, like your house, these kinds of purchases offer no financial return on investment. It's no wonder that these are the things that litter our credit card statements and make us feel financial pressure.

Now that we're clear on what assets are -- and how to determine what kinds of assets you currently own -- stay tuned for more finance definitions and how to use them from MomVesting!

To talk finance now, find us on twitter at @MomVesting!

Image Courtesy of Wonderlane

Andrea's picture

Andrea wrote:

Mon, 10/25/2010 - 18:32 Comment #: 1

Now you tell me, after I've sunk all my money into shoes! :)

MomVesting's picture

MomVesting wrote:

Thu, 10/28/2010 - 00:33 Comment #: 2

That just means you can go without buying more for longer, right?

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