Personal Finance: Assets
Assets are property that a person owns, or legally significant records of this property, that can bring economic benefits to him in the future. On paper, Assets are part of the Balance Sheet. Assets are always funded by Liabilities.
The assets include:
- real estate (houses, apartments, cottages)
- movable property (cars, planes, boats)
- cash (cash and non-cash)
- savings (deposits, retirement accounts, savings insurance accounts, etc.)
- investments (stocks, bonds, funds, mutual funds)
- own business (operational management)
- loans issued (funds owed to you)
- precious metals (in physical and virtual form)
- *cryptocurrencies (while there are no “rules of the game" their status is not very clear)
- goods in use
- luxury items (paintings, wine, jewelry)
- *personal brand
Depending on which angle you look at, assets can be classified in very different ways:
- by profitability
- by liquidity
- by risk
- by period of use
- by heredity
- and many other classification options.
The main characteristics for us will be the first three.
Assets can be profitable (to generate income) and unprofitable (not to generate income and even generate a loss). Income, in turn, can be expressed in 2 main forms:
1 return on capital: bank interest, interest on loans issued, stock dividends, bond coupons, rental income
2 increase in the value of an asset: an increase in the value of real estate, shares, cryptocurrency, collection wine, paintings, etc.
A prime example of an unprofitable asset is a personal car (unless it is rented out or used to make money). Legally, it is an asset, but it only generates a loss (gasoline, taxes, maintenance, repairs).
Difficult in terms of determining profitability is an apartment in the property. The “fat” 2010s greatly distorted the understanding of an apartment as an asset. Everything got expensive. It was possible to buy air at the “pit” stage for 1 million, on the third floor the “apartment” already cost 1.3 million, and so on. Returns were high or very high. But times have changed. Now apartments, in general, do not rise in price, and very many have fallen in price. It is still necessary to add maintenance and repairs, utility bills, taxes and all other payments to the expenses. But nevertheless, for personal finance: Owning an apartment is an asset that does not generate income or generates a loss.
Rule of “good” Balance asset #1. The share of profitable assets should grow in the structure.
This term is derived from the Latin ‘liquid’. It characterizes the speed and ability of an asset to be sold at a market price and turn into money. According to the degree of liquidity, assets are:
- absolutely liquid – physical money
- the most liquid – money on current accounts, demand deposits, foreign currency, shares ("blue chips") in the form of electronic records
- quickly realizable – deposits in banks, mutual funds, ETFs, precious metals in electronic form, cryptocurrency
- slow -moving – shares of the second tier and in physical form, issued loans, real estate
- difficult to sell (illiquid) – issued loans with delay, real estate, cars, collectibles, own business
This list is non-exhaustive and assets of the same type do not always behave the same in different cases. For example, the speed of sale of real estate objects can vary greatly.
Rule of “good” Balance asset #2. Your assets must have good liquidity. The financial cushion should not consist of illiquid assets.
The risk for assets is different – this is the loss of their value, a decrease in profitability, direct losses, lost profits. You need to remember: there are no absolutely risk-free assets! Loss of value is possible for everything. This is the nature of our world. My classification below is appropriate for the current situation (without global wars, cataclysms, etc.)
You also need to remember the rule: the higher the return, the higher the risk.
Assets at risk can be divided into the following:
- with minimal risk – deposits in state and commercial banks up to 1.4 million conventional units (or in the equivalent currency), federal loan bonds (OFZ), treasury bonds (US Treasures)
- with low risk – deposits in the TOP-3 banks of the country over 1.4 million conventional units, structural products with capital protection
- with medium risk – index funds (ETFs), mutual funds, blue chip stocks, bonds of top borrowers, pension savings*
- with high risk – deposits of more than 1.4 million conventional units in banks from the top ten rating, bonds of unreliable borrowers, start-ups, issued loans with a receipt, real estate, highly specialized equipment
- with the highest risk – venture investments, cryptocurrencies, the internal “currency” of financial pyramids (I do not call for participation in pyramids in any way, there are just rare examples of successful participants), loans issued without a receipt or an unreliable borrower
*Retirement savings around the world are one of the most reliable Assets. They are one of the most reliable and "long" money. However, in state practice, pension accounts are a rather risky Asset. Legislation changes very often, and not in favor of the person. For the past few years, the funded part of the pension has been “frozen”, and it is not a fact that they will be unfrozen.
In fact, there are so many risks that there are specialized risk management specialists in banks, large organizations, and investment companies.
Rule of “good” Balance asset #3. You should have both “defensive” assets and “active” assets. Determine your acceptable level of risk that you are willing to take. The asset structure will depend on it.