When we talk about financial fitness, one of the measures that is most important to the conversation is the value of our assets. There are really five different kinds of assets that we should consider:
Personal Assets. Clothing, furnishings, and jewelry fit into this category. Most of this “stuff” decreases in value to less than half what we paid for it before we even get it home.
Household Assets. This includes real estate, cars, and appliances. Most of these items either appreciate in value over time or provide a fair value over their life (in relation to renting the service). The total value of these assets must be reduced by any loans that we have against them – such as mortgages and auto loans. This will produce a net value of Household Assets.
Employment Assets. Some employers still provide for a pension for their employees’ retirement. This pension has a value, and should be considered an asset. Since most companies have under-funded their pension plans, you might discount the value of this asset, but you should still consider it if you have a pension available to you. In addition to the pension value, consider the value of your employability – this is an asset as well. If you are able to work and earn an income, this asset (your skillset and therefore your earning power) is one of your most valuable, especially in your earlier years.
Social Security Assets. Given that Social Security’s solvency is in question these days, often we don’t even think about this benefit as an asset. Unless it is eliminated entirely, though, we should still consider the value of this future income stream as an asset. It would be wise to discount it somewhat, due to the fact that the system is vastly underfunded and will become overburdened over the next several years as the Boomers continue retiring and drawing benefits.
Financial Assets. This is the 401(k) plan, IRA, brokerage, mutual fund and savings accounts that you’ve established. This one usually gets the most attention, because it tends to trump all the other types of assets. When you have plenty in this category, you don’t tend to worry about the other categories, because you can always use the money from here to buy the goods and services to cover those other categories. This is also one of the primary types of assets that we have some degree of control over.
Now for the good news – even though most of us don’t have anywhere near enough set aside in the financial assets category, it’s not impossible to build things up in order to make your future a little brighter.
The problem is that we have built up some unrealistic expectations about some of our asset types, and we need to deal with these in order to ensure a comfortable future.
The first of these illusions is that our personal assets will somehow contribute to our future security. Take a stroll through the Goodwill store and you’ll see the illusion of what those things are worth, should you ever need to sell them.
Secondly, and possibly the most harmful of these illusions, is that our household assets can be quickly turned into financial assets. This illusion is harder to break, because past generations have done this successfully: most retired residents of Florida and Arizona had very little in financial assets before they sold their household assets in New York or Chicago or Los Angeles. It doesn’t work as well for those of us in the great Midwest, where property doesn’t “bloom” in value every year. And as we saw in the Great Recession, these property values can be nothing more than an illusion.
So – how can you tell if you’re doing the right thing with your assets? Here are some basic benchmarks to consider:
- If your monthly budget focuses more on Personal Assets than your Financial Assets, your focus is in the wrong place and trouble is on the horizon.
- If your Household Assets are growing faster than your Financial Assets, you’re fortunate to live where you do. But you may be heading for a problem in the future, having to sell your home in order to provide funds to live on, because that’s where your money is.
- And a sign that you’re headed in the right direction – if your financial decisions revolve around reducing your mortgage or increasing your financial assets rather than purchasing or paying for Personal Assets, then you’re doing the right things. Keep up the good work!
The two primary places that you should place focus on in order to improve your overall financial condition are your employment skillset and your personal Financial Assets.
There is no better way, at any point in your life, to improve your financial condition than to increase your earning power by taking on new skills. This earning power will translate in to more discretionary earnings each month, allowing you to add more to the savings plans that you have available to you. Handled carefully, both of these types of assets can serve you well for a long time into the future.