A is All about Accumulating Assets
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner
I am embarking on an interesting journey. Over the next 26 weeks, I intend to cover Personal Finance from A to Z. The natural place to start is with the asset-building process, which is necessary for long-term financial stability. So A is all about accumulating assets.
According to the Random House Dictionary, one definition of an asset is a single item of ownership having exchange value. In other words, an asset is something you own that you can convert into income.
Examples of assets include:
- Savings and checking accounts
- Retirement and other investment accounts
- Your home
- A business
It’s not just about how much money you make.
Many people think that if they make a high salary, then they are wealthy. This is not necessarily the case. Your wealth is determined by the following equation:
Wealth = Assets – Debts
If you spend everything you make, you have nothing left over to add to your savings account or contribute towards your retirement. In other words, you are not accumulating assets.
If you take on a lot of debt, you need to work harder to increase your wealth. Your assets need to grow at a faster rate so you can cover your debts and increase your wealth. The quality of your assets matters.
Invest in assets that go up in value.
This sentence may seem like a no-brainer, but you would be amazed at how many people don’t follow it. People like to spend their money on tangible things like their homes, cars, electronics, and clothes. Over the long run, your home should go up in value, although that’s not guaranteed and it may not be at the rate you originally thought.
But these other things go down in value – cars depreciate, clothes wear out, and electronics become obsolete. Yes, you can sell them later on to generate income, but it will be at a price much lower than what you originally paid for them. I’m not saying don’t spend any money on these things – just pay for what you need and save the rest of your money.
We invest in financial assets like CDs, stocks, and bonds because they all have the potential to increase in value. The rate at which they increase in value depends on many risk factors. The greater the risk, the greater the expected return (although actual returns can vary from year to year).
Take the 52 Week Money Challenge.
For those of you who need to start the asset building process, try taking the 52 Week Money Challenge. I first heard about this from some soldiers in Arkansas. You start by saving $1 the first week. Each successive week you increase your deposit by $1. At the end of the year you will have saved $1,378. You can put this money in your emergency savings fund or as use it for your annual IRA contribution.
Visit my Basic Financial Management page for more information.