When I talk to my parents about personal finance, they sometimes refer to big expensive things they own as “assets.” I understand that, generally speaking, assets are something we consider to count toward someone’s “net worth.” But I’m not sure I understand why. If you buy an engagement ring or a car or something, that money is gone–you’re not going to just sell that stuff off again to buy a new TV or whatever, so it’s not really cash, right? What’s the point of having “assets,” and what makes a house an asset in the way that a 4K TV is not?
You have the general idea of an asset right, and you’ve pointed out one thing that makes assets like a home potentially less useful and valuable than cash. But this doesn’t mean that assets are not extremely important. Let’s take a closer look, beginning with what defines an asset and moving on to what assets are and are not good for.
The definition of an “asset” can be a little fluid, but we generally agree that an asset is something with a high value. In finance, experts usually also stipulate than an asset should be something that is expected to “provide future benefit.” But we don’t have to interpret this too strictly. Most people would call a real estate property an asset, even if the owner has no plans to sell it in their lifetime. The property could be sold, and that makes it an asset. You’re right to note that most people would not move into a smaller house in order to generate the cash to buy a $4K TV, but the fact that the house could be sold in a pinch provides a safety net for more serious financial needs, and that is part of what makes it an asset. People don’t usually make a home purchase expecting to sell the place anytime soon, say expert custom home builders, but that doesn’t mean that the home isn’t valuable. The same things home buyers look for in a great home–superior construction, a great location, and so on–won’t matter if and when the property is sold down the line.
These qualities matter in part because one key to a good asset is its ability to maintain–or perhaps even increase–its value. That’s not a requirement of an asset (a car, for instance, can be an asset even though its value shrinks over time), but it certainly makes an asset more appealing!
Assets are not, of course, the same things as cash. This is obviously true of a home that you have no intention of selling, but it is also true of things you do intend to sell someday, from stocks to valuable collectables. The difference, of course, is that you will generally have to sell your asset before you use its value to buy something else–ours is not a barter economy! And that brings into play something called liquidity.
Liquidity is an economic term that refers to the ease with which you can swap something for cash. Not all assets are equally liquid, of course. And how much you want to part with something isn’t the determining factor here, either–what we’re concerned about is the number of buyers. You may never intend to sell your engagement ring, but if things go wrong and you need to cash it in, experts who sell beautiful engagement rings in Brisbane tell us that getting good value for the piece should be a whole lot easier than selling a house (though, of course, they hope you never have to sell your ring!). On the other hand, you may desperately want to move and sell your house–but you’ll have to wait a while, because houses take a while to sell. So homes are less liquid than rings, of course. The most liquid thing of all is cash. Popular stocks (ones that are traded often, and always have ready buyers) are popular investment vehicles because they can increase in value but remain highly liquid.
Now our picture begins to come together! Assets are valuable, but they’re not all created equal. Investments can help you grow your wealth without locking it up in illiquid assets; larger and less liquid assets, like a home purchase, are assets that you may not ever have to draw value from in your lifetime. Real life can be a bit more complicated, of course (for instance, you could turn your highly illiquid house into a source of cash by getting a reverse mortgage–but that’s a subject for another post). But hopefully the picture we’ve painted has helped you understand what your parents are saying. Good luck with your financial future!
“Enthusiasm is the greatest asset you can possess, for it can take you further than money, power, or influence.” — Dada Vaswani
