Thanks to Rich Dad Poor Dad (then bankrupt Dad too!) many people know what are assets and what are liabilities…I am making ONE more distinction….
Assets: are those assets which increase your REAL NETWORTH (NW)
Assets: that increase your nominal NETWORTH
Assets: that are essential for your living and usage
Assets (liabilities!): that are not essential, but you have bought them to impress others and SHOW OFF ASSETS.
Networth = Assets Minus Liabilities
The normal, rational economic man should aim to increase his net-worth over a given period of time.
The first set of assets that increase your REAL NW are assets like equities, rental properties, trading properties etc. These assets give good returns over long periods of time. As they have a high fluctuation in the returns from year to year, they also require a lot of skill and patience in buying, holding and selling. This asset class assumes that you know why you have bought, have the skills, know when to enter when to exit etc. Just buying some ULIP because a RM told you to or an agent told you to does not increase your net worth, it can even reduce your nw.
Assets that increase your NOMINAL NW are assets like bank fixed deposits, ppf, nsc, gold and residential house. These assets will not make your NW go up in leaps and bounds, but will take it up steadily. Adjusted to inflation you may get +1 % or -1%, and the standard deviation will be very low if not 1. A portion of your assets should be in this class of assets too – they give you comfort. Your residential asset is expected to go up gradually – please do not look at the past 10-20 years data in ONE city and scream. If you want to look at a short time frame of say 30-40 years look at ALL world data. If you want to look at 100 years data look at a smaller region…
Assets that are actually expenses: Many people consider a HOUSE in which they live as an asset which increases their NW. Not true at all. The house will have to be re constructed after say 30 years. After all the bricks, steel, mortar and cement are just commodities. However given a shortage of land real estate prices go up – remember it is the cost of the LAND that is going up. So a car, a house, etc. are in this category – they are assets which you use. If it appreciates, that is luck, not strategy! However some of these assets are ABSOLUTELY essential as they help you in reducing expenses. So a washing machine, a car, a house, are assets that will save you money, but not make you rich.
The worst class of assets are the ones that you buy to impress others. A big huge house where you struggle to make the EMI payments. A 25 year vacation package. A show off car that you do not need professionally. These are NOT assets at all. They are liabilities. They suck your cash and get you addicted to a higher end of life style which you may not be able to sustain.
So I hope this clarifies to you what are assets and what are liabilities.
In a corporate atmosphere HO is a liability. Factories, machinery, etc are the usage assets. Brands are the appreciating assets……!!
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