We display or demonstrate our material well-being by showing off things we own. It is as simple as that.
Some of the things we own have a specific monetary value (their value can be easily measured in money). They can be sold outright, and/or they enable us to generate income. Such possessions are called ASSETS. Examples include cars, houses, shares in companies, cash, and jewelry. There can be many more.
Recapping the most important characteristics of the possessions we call assets:
- Their value can be easily measured in money.
- Their material value is substantial – to us, and generally also to our peers and others. They generally cost us a lot of money initially; in some cases also subsequently (storage and maintenance costs, taxes, etc.).
- They could be sold, and/or they enable us to generate income. (For example, we own a laptop; we use it in our work, but we could also sell it.)
But what about our possessions that do not fit the definition above? For example, we have a flower; we couldn’t sell it for any significant sum, nor can we use it to generate income. We had to spend money (or time, effort and/or other resources) to obtain it. We categorize such items (or the resources we expend to obtain and/or maintain them) as EXPENSES.
You don’t have to feel guilty for spending on expenses. Many are unavoidable; others result in non-material assets, such as knowledge (“informal education”). However, many people have expenses that are unnecessarily large, or not (strictly speaking) necessary at all. They just satisfy a need for fun, prestige, or social status, or satisfy vanity or other human failings.
Your assets drive your future wealth. Some of your expenses may do the same.
Here’s another aspect of assets (and some expenses): they can be either perishable or non-perishable.
It’s easy to name examples of perishable assets: houses, cars, appliances, bank deposits and so on. Such assets have finite lives (just like we do). In most cases their value decreases over time: they break down (depreciate), they become obsolete, or inflation eats away their value. Though they are perishable, such assets can provide us with return value over their useful lives.
The non-perishable asset category is far more interesting. Examples include businesses, land, stocks, patents, technologies, and antiques.
Different from perishable assets, in many cases these become more valuable as years go by. Their market price increases. Some have useful lives that are, for all practical purposes, infinite. So, we should invest all our money in non-perishable assets, right? Well, no. There’s a catch. The initial value of such assets can be quite low, or even negative (they start out as burdens, eating up resources). One has to invest significant resources to develop them. Further, the success rate of things in this category is often as low as 2%. And in many instances, the fruits of investment in such assets can only be harvested by future generations.
There are two things I can advise you about asset management. First, challenge your assets’ values periodically. That is, re-examine their value on a monthly or annual basis, comparing your initial valuation against current market prices, or using a reliable model.
Second, when planning for the future, always take into account your assets’ (estimated) useful life. More on this, later on.