What Is an Asset?

When people asked this question, they are confused between ‘possessions’ and ‘assets.’ Your home, vehicle, jewelry are not assets. A good definition of the term ‘asset’ is something that can generate income. This is how a financially intelligent and knowledgeable person defines an asset. It is nothing but a personal possession that has earning potential. That means income producing a property can only refer 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 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 the behavior and market valuation, assets 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 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 called ‘appreciating assets’ which include commodities like gold and silver, growth stocks, and open land.

Growth assets focused on appreciation in the value of assets. A good investment portfolio can be built with these two types of assets, which is the sure way to generate wealth.

At best, home and jewelry are distress assets – things that can be sold under challenging situations for money. Many people overspend on their home, assuming that it is an asset (instead of possession). The same house will not be able to attract suitable rent for the amount of investment because the tenant does not share the emotion of home ownership and looks for functionality at a reasonable price.

Similarly, jewelry cannot be sold when the precious metal rates are high because of sentimental attachment. This again affects the ability to maximize 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 reduced buy liabilities first and then hope to acquire income generating assets in the future. It becomes complicated to generate income as you already have a significant burden in the form of financial 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 into assets rather than possessions.