Assets That Add To Your Net Worth

There are so many classes of assets but only few are relevant enough to be classified as assets to increase your net worth.

One of the best personal finance books of all time, “Rich Dad Poor Dad”, took a slightly different spin on what we consider assets to be and what liabilities are. According to author, Robert Kiyosaki, an asset is anything that adds money to your pocket and a liability is anything that takes money out of your pocket.

In other words, if you spend half a million on an item say the latest iPhone, and it does not add monetary value in any way, it cannot be considered as an asset even if it is material enough to sit in the assets portion of an individual’s balance sheet or that of a small business.

It also means that when you purchase a car, and you spend more on it than you earn from it, you have incurred a liability and not an asset.

Net worth = Assets - Liabilities

In determining your net worth, only certain assets are relevant and attributed to adding to your value and they are typically large income producing assets or assets that can be resold at a future period for more. Here are the most common ones:

Real Estate

This is probably the most apparent asset that increases your net worth. When you have a real estate property that is fully paid for, you have an asset. If, however, you’re still repaying the loan that was used to purchase it, then it really isn’t an asset – not just yet.

This is because you have to subtract the liability element to determine its true worth. Real estate here, covers your places of residence, rental homes, leased properties, and any other items that fall into the “Land and Building” line item on your balance sheet.

Land and building tends to increase in value over time. However, there are periods say during recessions that these items lose value. They are generally rare.

Art/ Jewellery

Art works, sculptures, collectibles, and jewellery pieces that can be resold for capital gains are also considered as assets. When it comes to art, however, it is very important that you are careful.

There are certain elements that need to be in place for art works to be regarded as an asset class. These are the things that set it apart from art that solely serve aesthetic purposes and not financial gains.

The history of the arts market shows that only art works by a selected number of artists show as well as art works that are unique with no close substitutes can yield returns overtime. The same applies to jewellery. Only the very best add to your worth. The others would generally reduce in value over time.

Investments

In all these things, investments are the only assets that are known to multiply in value, making them the ultimate assets to build up your net worth. Investments here cover almost everything ranging from retirement plans, mutual plans, treasury investments, bonds, and of course, stocks.

While these assets can indeed multiply in value beyond any other class of asset, they are also the most volatile. This is why you occasionally hear news of billionaires who lose their billionaire status overnight and probably get it back in a few weeks. Where there are takes on your investment type, the taxes have to be deducted before computation as well.

The major challenge that comes with calculating your net worth lies in determining the market value of the assets. In other words, you are to record the amount the asset would be sold for today for cash and not how much you purchased it.

As far as investments go, you would be required to take the volatility and risk elements into consideration while also being as conservative as possible.

With the right items recognized at their right values, you would know your true financial worth.

Written by Lawretta Egba.