Assets: Anything that you may own, that has some value, and that can be converted into cash.
People, corporations, non-profits and governments can all own assets. Examples of common assets include:
- Cash and cash equivalents: money/cash, CDs (not compact disks – although they may have value too – but rather certificates of deposit with your bank), positive bank account balances (savings & checking), money market accounts (savings accounts that offer a competitive rate of interest in exchange for larger-than-normal deposits; sometimes referred to as MMDA – "money market demand account"), Treasury bills;
- Long- and short-term Investments like variable annuities, bonds, the cash value of a life insurance policy (if any), mutual funds, pensions plans, retirement plans (IRA, 410(k), 403(b)), stocks, ETFs, etc.
- Property, or “real property”, that includes land, and any fixed structure that is permanently attached to it;
- Personal property – i.e. things that you own that is not real property e.g. boats, collectibles, household furnishings, jewelry, vehicles, etc.
Note that if an asset is acquired by using debt, or leveraging (e.g. a mortgage used for purchasing a house), the use of borrowed funds does not necessarily decrease the value of the asset, but rather the value of the titleholder’s net worth (see below).
The cash value of assets are often declared by sellers, but almost always finally determined by the market. Using a residential home as an example; the value is determined by a willing buyer offering an acceptable purchase price to a willing seller… i.e. the asset value is not determined by the owner’s desired asking price, neither a realtor’s speculative estimate sales price, and nor the local municipality’s valuation (for property tax purposes).
Assets are often grouped into two broad categories: liquid assets and illiquid assets:
- A liquid asset is one that can be converted into cash quickly with little to no effect on the price received, like stocks, or cash under your mattress… or preferably in a bank account.
- Illiquid assets, on the other hand, are assets that cannot be converted into cash quickly without substantial loss in value. For example, the more desperate you are to sell your house, the more likely you are to achieve a lower selling price! Examples of illiquid assets include your residential home, antiques, ownership and/or equity in your own business, etc.
Liabilities: a fancy word for debt. Really… liabilities include any money (or services) that you may currently owe another party. Common liabilities include the house you live in (assuming it’s actually owned by a bank), your student loans (or those that you have co-signed as guarantor), and any amounts you owe on your credit cards.
Other forms of liabilities may be less obvious and include, for example, the property taxes that you owe to the local government (municipality) on the house that you live in, which may be owned by a bank (or other mortgage/lien holder).
Sometimes, we call debt by another name, like leveraging. People sometimes say that a company is highly leveraged, meaning the company uses borrowed money to e.g. pay for the manufacturing of its products. Mortgages are also called home loans. The naming convention Credit cards represents dubious terminology for short-term, unsecured debt (generally subject to high interest rates).
Net worth: calculated by subtracting the value of all your liabilities from the total value of all your assets (and not the other way around!).
Essentially, your assets are everything you own, and your liabilities are everything you owe. A positive net worth indicates that your assets are greater than your liabilities; a negative net worth signifies that your liabilities exceed your assets.
Times are tough for many people, but you simply cannot build any wealth if your net worth is negative.
Keep in mind that achieving a positive net worth is entirely within everyone’s control and actually quite easy to achieve… it starts with simply refusing to buy anything that you simply can’t afford, or don’t really need, e.g. a larger house, new car, new clothes, etc.