Asset is a crucial term used in the finance world. Knowing the meaning is essential when it comes to your financial literature. However the true definition of the word can be different from person to person and I will explain why below.
What is an asset?
An asset is widely recognised as anything owned by a person or business that provides value to them. That can be anything from a worker of a company to a printer or computer. https://www.investopedia.com/ defines an asset as:
"A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit."
On a financial balance sheet anything that holds value is placed under the assets column. This is where people's understanding and definition of an asset can differ from person to person and I will explain why!
What asset should actually mean?
Robert Kiyosaki the famous author of Rich Dad Poor Dad does not really agree with the definition of an asset stated above, and I tend to agree with him! Roberts definition and understanding of an asset is anything that puts money in your pocket. Quite simple but effective! Now this eliminates a lot of assets which you may have listed in your own column. For example.
What would you say a car is to you?
An asset most would say! And yes theoretically it is a tangible object that holds value. However, when we look at Roberts definition which is anything that puts money into your pocket, a car is not an asset! In this case a car would be a liability.....
Now the evidence to back that statement is the car is costing you money! When it comes to a car you have ongoing costs, things like petrol, insurance, registration, servicing and depreciation. All of these things cost money so why do we put a car under the asset column? That is where the definition of an asset differs from person to person.
Personally I prefer Roberts definition of an asset. It makes more sense to me personally to have a list of my "assets" which are all making me money opposed to some actually costing me money. In my own financial journey my aim is to strictly build up my asset column! This being cashflow vehicles that can improve wealth over time.
Why you need to acquire cashflowing assets
If financial freedom or building wealth is your goal then acquiring assets (cash flowing ones!) is essential. If you have not already read the the 2 simple things you need to get rich it highlights the important of multiple streams of income when it comes to being rich. It seems like common sense!
The common example of this is investing in real estate and stocks both if invested correctly can give you a positive cash flow! Hence meaning they will come under you asset column. Straight away you can step back and see 3 streams of income all adding to your wealth (assuming you have a current job of some sorts.)
Now if you have been reading youngmoneyinvesting.com then you know that the next smart step is compounding your money! This meaning the return from your assets are reinvested into more cash flowing assets. What does this do you ask? It just snowballs and snowballs into something you would not even think of.
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