When we decide to use a portion of our disposable income for everyday living expenses, we do so to fulfill a need. Likewise, when we use an amount of our disposable income for luxury goods, we do so on items that can become future assets. Economists define assets as items that can provide economic benefit to an owner. Assets can be tangible or intangible. Examples of tangible assets include cars, homes, and antique items. Intangible assets include human capital (education, training, or skills), patents and trademarks. Stocks and bonds are financial assets that many people use to build wealth.
Financial assets are intangible assets. When you purchase an index fund or individual equities and bonds, you buy an asset with a current value. For all assets, the asset’s future value can fluctuate over time. Many people hold financial assets as part of their asset portfolio to earn a rate of return in the future. Similarly, tangible assets also fluctuate in value over time. Real estate values can differ over long periods. Many individuals build wealth through their home equity.
Simply put, wealth is the total net value of all the individual’s assets. The more assets you own, the more likely you will have a higher net worth. Some people purchase assets for consumption. For example, you may buy a lovely home or a high-quality automobile that is comfortable to drive. Or, you may have assets for investment, such as rental properties that generate income or brokerage accounts that build wealth. The bottom line is this: accumulating assets aims to build your wealth while maintaining your current consumption patterns that provide you with an adequate standard of living. Failure to build wealth during your working years may set you back in retirement.
Take some time this week to review your current net worth. What assets do you own? What assets would you like to own? After pondering those questions, incorporate those thoughts into your financial plan as goals. Set attainable milestones that you can reach over time when acquiring assets. Acquiring an investment takes time to happen. With careful planning, you can add productive assets to your portfolio that will generate long-lasting wealth.
Mr. Johnson is the Director of Financial Aid and an adjunct faculty member at Goldey-Beacom College.
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