Financially speaking, assets are resources you own that have value. That can include everything from your car to your 401(k) balance. Ideally, the value of your assets will increase over time.
Assets are important because they're used to calculate your net worth. When weighed against your debts, they can provide a snapshot of your overall financial health. Here's an easy-to-digest breakdown of what assets are and how they work.
What Is an Asset?
An asset is anything you own that has value attached to it. This can include physical things such as jewelry or real estate, as well as non-physical assets—like stocks, money in a savings account or intellectual property. If it holds value and could be used to offset your liabilities, it's an asset.
Liabilities are debts. Loans, mortgages and credit card balances all fit into this category. Your net worth is calculated by adding up the value of all your assets, then subtracting your total liabilities. A negative total indicates that your debts outweigh what you own (and vice versa). The idea is to grow your assets while reducing your debt load.
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Common Types of Assets
The term "assets" casts a wide net. Below are the most common types, along with some examples of each.
Personal Financial Assets
These can include liquid assets, which can be easily swapped for cash, or illiquid investments. Personal financial assets include:
- Checking or savings accounts
- Certificates of deposit (CDs)
- Money market accounts
- Retirement accounts
- Mutual funds
- Exchange-traded funds (ETFs)
- Valuable family heirlooms or antiques
- Real estate
Individuals aren't the only ones who can hold assets. Businesses also have assets on their balance sheets.
- Intangible assets: These are non-physical resources that have long-term value for a business. They're meant to bolster an organization's worth over the long haul. Some examples include a company's copyrights, reputation, trademarked branding and brand recognition.
- Tangible assets: These types of business assets can take two forms. Current assets are typically held over the short term and can easily be converted into cash. That might include outstanding invoices and inventory. Fixed assets, on the other hand, are usually held long term and are used to run and grow the business—like real estate and essential equipment.
What to Consider When Choosing an Asset
For the sake of simplicity, let's focus on personal financial assets. There isn't one asset class that's necessarily better or stronger than another. Instead, the goal is to diversify your investment portfolio with a healthy mix of different assets. This is known as your asset allocation. It can help balance the potential risks and rewards of each asset class. If one declines in value, the hope is that you'll have other well-performing assets that can make up for it.
Choosing the right asset allocation depends on your unique financial goals, risk tolerance and investment timeline. If, for example, you're a long way out from retirement, you may choose to invest in high-risk assets that have better potential for long-term growth. Meanwhile, retirees might opt for safer investments to protect them from market volatility.
- High-risk assets: These generally net better returns, but there's also a higher risk of losing money. They include individual stocks, cryptocurrency, private equity, hedge funds, venture capital and peer-to-peer lending.
- Low-risk assets: These typically provide a steady stream of income, though returns usually aren't as robust. Low-risk assets include savings accounts, CDs, money market accounts and bonds. ETFs and mutual funds also represent safer ways to invest in stocks.
The assets you choose will ideally appreciate in value. That means they'll eventually be worth more than you paid for them. Depreciation happens when an asset's value decreases.
It's impossible to predict which assets will be winners—all investing comes with some level of risk. Again, balancing your portfolio with a diverse combination of high- and low-risk investments is probably your best bet. That's where your asset allocation comes in.
The Bottom Line
Financial assets come in all shapes and sizes. Some are material assets you can touch, while others are intangible but hold value all the same. Choosing the right assets for your investment portfolio comes down to your goals and personal financial situation. The goal is for your assets to eventually outweigh your liabilities.
To that end, paying down your debts is a good thing for your financial health. Begin by checking your credit score and credit report for free with Experian, then using that information to make a long-term financial plan that allows you to invest in a variety of assets.