An asset is any item that you own that increases your net worth, as opposed to a liability that decreases your net worth. Examples of assets include the money in your bank account, property like your house or your car, and personal items like your TV, fine art or appliances. Knowing what assets you have and how much they are worth helps you make better financial decisions.
Calculating Your Net Worth
Your assets are only half the equation when it comes to figuring your net worth. To figure your net worth, you must subtract the amount of your liabilities from the fair market value (not what you paid) of your assets. Using finance software, like Quicken, can help you track your assets, liabilities and net worth all in one place.
Assets Change in Value
The value of your assets isn’t fixed forever. Some assets, like your home, generally appreciate over time, which means they go up in value. Other assets, like your car or your TV, generally depreciate over time, which means they lose value. So, even though you might have paid $20,000 for your new car, it might only be worth $9,000. Investments, like stocks or mutual funds, while intended to increase in value, don’t always go up as expected.
Assets as Collateral
When you borrow larger sums of money, the lender will often want you to use your assets as collateral. This means that if you don’t pay back the money, the bank can take the assets instead. This is common on a mortgage, home equity loan or car loan. For example, when you borrow to buy a house, the bank will use the house itself as collateral and if you aren’t able to make your mortgage payments, the bank can foreclose on the home.
Insuring Your Assets
Insurance protects your assets in case of an unexpected casualty, such as a fire, car accident or home robbery. Reviewing your insurance to make sure you are adequately covered helps you avoid an unpleasant surprise if something does happen to an asset and your insurance isn’t enough to cover it. For example, if you’ve been skimping on your homeowner’s or renter’s insurance by only carrying $10,000 of coverage when your items are worth $25,000, you may have a hard time replacing everything should damage or loss occur.
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