2.3: Assets
- Page ID
- 112045
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- Identify the purposes and uses of assets.
- Identify the types of assets.
- Explain the role of assets in personal finance.
- Explain how a capital gain or loss is created.
As defined earlier in this chapter, an asset is any item with economic value that can be converted to cash. Assets are resources that can be used to generate income, reduce expenses, and store value. The following are examples of tangible (material) assets:
- Car
- Savings account
- Wind-up toy collection
- Money market account
- Shares of stock
- Forty acres of farmland
- Home
Assets can be used to store wealth, generate income, and mitigate future expenses.
Assets Store Wealth
If the asset is worth more when it is resold than it was when it was bought, then you have earned a capital gain: The investment has not only stored wealth but also increased it. Of course, things can go the other way too: the investment can decrease in value while it is owned and be worth less when resold than when it was bought. In that case, you have a capital loss. The investment not only did not store wealth, but it also lost some. Table 2.3.1 shows how capital gains and losses are created.
| Buy lower | then sell higher | Capital GAIN |
| Buy higher | then sell lower | Capital LOSS |
The better investment asset is one that increases in value by generating a capital gain during the time it is stored.
Assets Create Income
Some assets not only store wealth but also create income. An investment in an apartment house stores wealth and creates rental income, for example. An investment in a share of stock stores wealth and may also generate dividend income. A deposit in a savings account stores wealth and creates interest income. Some investors prioritize increasing asset value, while others focus on generating income from their investments.
Assets Reduce Expenses
Some assets are used to reduce living expenses. Purchasing an asset and using it may be cheaper than arranging for an alternative. Sometimes an asset may be expected to both store wealth and reduce future expenses. Table 2.3.2 shows the roles of assets in reducing expenses, increasing income, and storing wealth.
| Asset | Reduce Expenses | Increase Income | Store Wealth |
|---|---|---|---|
| Car | Yes | No | No |
| Savings Account | No | Yes | Yes |
| Money Market Account | No | Yes | Yes |
| Home | Yes | No | Yes |
| Rental Property | No | Yes | Yes |
| Investment in Bonds | No | Yes | Yes |
| Investment in Stocks | No | Yes | Yes |
The choice of investment assets depends on your belief in their ability to store and increase wealth, create income, or reduce expenses. Ideally, your assets will store and increase wealth while increasing income or reducing expenses. Otherwise, acquiring the asset will not be a productive use of liquidity. Additionally, in this case, the opportunity cost will be greater than the benefit from the investment, as there are many assets to choose from.
- Assets are items with economic value that can be converted to cash. You use excess liquidity or surplus cash to purchase an asset and store wealth until you resell it.
- An asset can create income, reduce expenses, and store wealth.
- To have value as an investment, an asset must either store wealth or create income (reduce expenses); ideally, assets can do both.
- Whatever the type of asset you choose, investing in assets or selling capital can be more profitable than selling labor.
- Selling an asset can result in a capital gain or capital loss.
- Selling capital means trading in the capital markets, a seller’s market. You can do this only if you have a budget surplus, or an excess of income over expenses.
- Record your answers to the following questions in your personal finance journal. What are your assets? How do your assets store your wealth? How do your assets make income for you? How do your assets help you reduce your expenses?
- List your assets in the order of their cash or market value (most valuable to least valuable). Then list them in terms of their degree of liquidity. Which assets do you think you might sell in the next ten years? Why? What new assets do you think you would like to acquire and why? How could you reorganize your budget to make it possible to invest in new assets?