The term “assets” gets tossed around pretty loosely these days. When it comes to financing, assets are anything of monetary value. Technically speaking, almost anything can be an asset, even a person (especially if they bring value to an organization). Assets are also a common term used in accounting and tax practices as well. Having assets is typically considered a plus because they are investments or objects that can be converted to cash if needed – and yes, of course, cash itself is considered an asset too.
We’ll start this blog off by defining what assets are, exploring the different types of assets, and identify which assets are good and which are bad. As part of Financial Literacy Month, understanding and protecting your assets can be very important in applying for a mortgage and making the most out of your financial picture. We will dive into how assets impact your mortgage applications.
What are Assets?
An asset is typically defined as anything that is of value that can be converted to cash. People, companies, and governments all own assets. For a person, an example of assets they own might be cash, investments, their house, or other forms of personal property such as a car, collectibles, household furnishings, expensive jewelry, etc. Your personal net worth is typically calculated by subtracting your liabilities from your assets. To simplify this even further,
So how are assets typically classified?
Tangible assets are those of physical substance. Also known as “touched assets” because you can actually touch them (metaphorically, as well). Examples of Tangible Assets include:
- Cash on hand
- A car
- Corporate Bonds & Corporate Stock
- Savings Accounts
Another way to think of tangible assets is as something that has transactional value and can be turned into cash (the speed of which is considered the “liquidity” of the asset).
Intangible assets, on the other hand, are non-physical, and can’t be touched. Examples of intangible assets include:
- Brand Value
- Franchise Agreements
Therefore it can be difficult to calculate the monetary value of intangible assets. However, they can still be of value to a person or company and can contribute to net worth calculations. Something such as brand value is obviously of great importance if you were purchasing a business, although it can be hard to place an exact dollar figure on.
Alright, so now that we have a better understanding of what assets are how they’re classified, let’s talk about how this is all relevant to you.
Good Assets vs Bad Assets
When you have a better understanding of assets and how they work, you can turn around and leverage them for financial gain. Just like there is good debt and bad debt, there are good and bad assets.
Some examples of Good Assets are
- Rental Properties
- Dividend-Paying Stocks, Bonds & Businesses
- Land (if appreciating)
Some examples of Bad Assets are
- Car Purchases
- Unaffordable Real-estate purchases
The best way to determine the difference between good and bad assets to ask yourself two questions:
- Does this asset appreciate, or depreciate over time?
- Does it generate positive or negative cash flow?
It’s very common for someone to be tempted to purchase a property because it fulfills one of the two questions asked above. But if you overspend on a lavish new house under the false assumption that the house is guaranteed to appreciate over time, you could end up making a large mistake. If you’ve heard the term “house poor” this is something you should avoid.
Assets Impact Getting a Mortgage
When going through the mortgage process, a mortgage broker will always take a look at your current assets. Your unbiased mortgage professional will review what assets impact your application. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets. Therefore it’s important to have a solid understanding of what assets are and a clear picture of all the assets you own. When working with a mortgage broker, we’ll help simplify this process for you and make sure you aren’t forgetting about any potential assets you own. This is just another advantage of using a mortgage broker as opposed to going to a lender directly.
Are you looking to make a large purchase, but are unsure about how it will affect your finances or potential to purchase a home in the future? Reach out to us at Centum Home Lenders to speak with one of our professionals. We’re always up for talking assets, especially during Financial Literacy Month. Get in touch with us here or stop by our office anytime!