To evaluate any business proposition or business, we always subtract its liabilities from its assets and if the residual is positive, we call it an income generating proposition or business. Likewise, if we are to assess our financial health, the residual must be positive. For this to happen, our assets must outnumber our liabilities, which will later create wealth for the future. However, the definition of assets can be confusing. Therefore, it is important to classify generalized assets into tangible or intangible assets.
An asset can be an item whose value keeps changing but significantly. This point is predominant because any economy suffers from inflation, thus reducing the value of the currency. Thus, an item whose exchange value keeps increasing can help us maintain our purchasing power and achieve financial growth.
What are the assets
Shares/UCIs: The prices of stocks, shares, or virtually anything related to the stock market are constantly changing. Although many factors can decide the stock market, it is fair to say that stocks or stocks have made many people rich. This asset creates income in the form of a dividend, an increase via free shares, and if the stock performs well, it creates an appreciation in value.
Bonds/fixed deposit: The type of asset that generates guaranteed returns and is a safe investment option. Government securities, corporate bonds, and term bank deposits are some of the examples that not only mitigate stock market risk but also share acceptable returns. This has a positive impact on your wealth creation.
Immovable: Some of us might be confused about how real estate can positively impact one’s net worth. The reason for this is its predominant appreciation nature as well as its ability to generate income through rent. There are multiple options such as direct investment in a commercial or residential property or one can even consider a REIT which requires limited cash outflows.
Cash at the bank: As holding cash can be dangerous, we are considering having cash in the bank. The most liquid asset on the list, cash can help you anytime. Although it may not be profitable to accumulate money in the bank account, it may be a good idea to create an emergency fund.
What are Passives
Auto: The price of your car starts to drop the moment you take it out of the showroom. Although a car can be called a necessity, it is important to note that it is one of the things that scares money away. It includes unavoidable expenses such as maintenance, insurance costs, repairs, car loan, etc. Even after you complete the term of an auto loan, the item may be added to your assets, but it will still qualify as a depreciated asset.
Home loan: Even though real estate is covered in the asset column, it might not be worth it if you buy it while taking on huge debts. Usually, the term of a home loan ranges from 15 to 30 years. For example, for a Rs 50 Lakh home loan at an annual interest rate of 7.5%, the buyer will end up paying more than Rs 45 lakhs in interest, almost the cost of buying the house. Ironically, real estate is an asset as well as a liability. Thus, unless the debt is fully repaid, the real estate remains a liability.
Credit card debt: The costliest of all liabilities is credit card debt. However, it can be avoided if planned well. Credit card interest rates are among the highest among its peers. Therefore, any partial payment or late payment incurs huge interest. Full and timely payment are the only two options to avoid credit card interest.
Why buy assets rather than liabilities
Appreciation: The most obvious reason, which not only helps to increase your net worth, but also protects you from inflation.
Compound : One of the main reasons assets beat inflation and help you build wealth. This happens when income from assets is reinvested to create additional income.
Wealth creation: The ultimate objective that occurs due to the appreciation of assets and the capitalization of income generated by these assets.
Stop the leaks of your income: Liabilities lead to debts and debts lead to leakage of your income. Buying assets helps you stop these leaks and increase your income.
Although some liabilities are unavoidable, wealth building only happens when your assets become strong. Therefore, keep liabilities to a minimum and buy assets for a happy future.
(Viral Bhatt is the founder of Money Mantra – a personal finance solutions company)
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