In personal finance, assets usually mean things you own that has monetary value. They are further divided into cash and cash equivalents, investment assets and personal use assets (click here to learn more).
However, if we really think about it, an asset should be a thing that can generate income. A car that requires monthly instalment, fuel and maintenance is not really an asset. On the other hand, if after taking into account all expenses, the car is still able to generate positive cash flow, then it is an asset.
In this article, let us redefine the meaning of assets.
Redefining Assets
We shall define assets as something that put money in your pockets, while liabilities take money from your pockets. This definition is espoused by Robert Kiyosaki, the author of Rich Dad Poor Dad.
Thus, the car that requires you to fork out money is not an asset, but a liability. On the other hand, if you use the car for e-hailing business, and it is able to bring in positive cash flow after deducting all the expenses and instalments, then it is an asset for you.
For me, I separate assets into income-generating and non-income generating assets. I still follow the traditional meaning of assets (what we own) and also incorporate the definition above (income-generating or non-income-generating). Generally, the income-generating assets will provide passive income to the owner but they can also be items or tools that you use to generate active income.
Thus, based on the definition above, most income-generating assets will be your investment assets. You may also include cash and cash equivalents if they are earning interest for you. Personal use assets generally do not qualify as you are not using them to earn income.
Once you accumulate sufficient income-generating assets that provide enough cash flow to cover your expenses, you have the liberty to retire when you see fit.
Broader Perspective
Other than the financial investments, assets can come in various forms. Here are some expanded categories of assets that should be considered in personal finance:
1. Human Capital
Your skills, education, and experience are assets that can generate income. Investing in your career development and continuous learning can increase your earning potential, making human capital one of the most valuable assets you can cultivate.
2. Health
Good health is an asset that enables you to work, enjoy life, and avoid costly medical expenses. Regular exercise, a balanced diet, and preventive healthcare are investments in this critical asset.
3. Relationships
Strong personal and professional relationships can provide emotional support, open up opportunities, and even lead to financial benefits. Networking and social capital are assets that can enhance your quality of life and career prospects.
4. Time
Time is a finite resource. How you allocate it can have significant financial implications. Time management and prioritising activities that align with your goals are essential for maximising this asset.
5. Knowledge
Staying informed about financial matters, investment strategies, and economic trends is crucial. Knowledge about personal finance is an asset that can help you make better decisions and avoid costly mistakes.
Integrating Non-Traditional Assets into Financial Planning
To incorporate the aforementioned non-traditional assets into your financial planning, consider the following strategies:
1. Lifestyle Design
Align your spending and lifestyle choices with your values and long-term goals. This might mean investing in experiences that bring joy or cutting back on expenses that do not contribute to your well-being.
2. Continuous Learning
Allocate time and resources to learning new skills or improving existing ones. This could be through formal education, online courses, or self-directed study.
3. Healthcare Investment
View healthcare expenses as investments in your future productivity and quality of life. This includes regular check-ups, fitness activities, and preventive measures.
4. Networking
Actively build and maintain your professional and personal networks. This could involve attending industry events, joining clubs or groups, or simply reaching out to friends and colleagues.
5. Financial Literacy
Educate yourself on personal finance topics. This knowledge can help you make informed decisions about saving, investing, and spending.
Conclusion
By redefining assets according to the above definition (income-generating and non-income-generating), it will reflect our financial situation more accurately. Furthermore, we could use the numbers to determine if we are ready to retire.
By including non-traditional elements like human capital, health, relationships, time, and knowledge in personal finance, it can lead to a more balanced and fulfilling life. By recognising the value of these assets and investing in them wisely, you can create a more resilient financial foundation that supports your overall well-being. Remember, the ultimate goal of personal finance is not just to accumulate wealth but to live a life that is rich in all aspects.
How can a financial planner help you?
I can help you to clarify your financial goals and objectives, and also classify your assets according to the definition above. We will also develop a plan to reach your goals and objectives. This normally involves saving and investing. Furthermore, I will also help with your tax planning to reduce your tax liability. Depending on your situation, we may also work together in other areas of your finances, such as debt management and estate planning.
If you are interested in working with me to plan for your finances, just leave your details by clicking the button below. I will reach out to you and see if we would be a good fit for each other.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
