Although the United States is home to many billionaires and millionaires, the average American falls behind in terms of financial literacy as reported by Forbes.com.
A lot of Americans remain clueless or have a very low understanding even of the most basic financial concepts. A financial analyst at CS&P asset protection services emphasized the importance of financial literacy for everyone, stressing how this knowledge can help them make informed decisions about investing, saving, and protecting their wealth.
In this post, we’ll discuss a very common and vital financial concept we hear very often – financial assets.
What is an asset?
An asset is defined as anything with financial value. It can be a tangible or intangible item or product, and can be in the form of economic resources or ownership that can be converted into cash. It is in direct contrast with liability which refers to money you owe.
Some examples of personal assets include your home, a commercial property, real-estate properties, high-value vehicles, checking/savings accounts, financial accounts, life insurance policies, valuable jewelry, and precious art/collectibles.
A business entity can also accumulate assets in the form of cash on hand, accounts receivable, stock, bond, and approved loans. Other business assets include vehicles, office property, inventory, equipment, and some book of accounts.
What are financial assets?
Financial assets are intangible assets, which mean they have no physical presence. Unlike commodities or properties that come with both a tangible object and documentary proof of ownership, financial assets derive solely from a contractual claim or the existence of a document that signifies ownership of the asset. Regardless of the absence of a physical object, financial assets are still included in a person’s or business’s net worth to reflect the value it holds.
The document, such as a contract, agreement or certificate, that signifies ownership of the asset does not have any intrinsic value until it is converted into cash. The value of the document derives from the value of the asset it represents.
Financial assets are liquid assets, which means they can be readily sold or converted into cash in a short period of time (no longer than one year). An asset protection specialist at IBConsult stressed that while financial assets are liquid their value can either increase or decrease depending on the assets’ current valuation. There are a myriad of factors, as well as opportunities and risks, that can affect the value of a financial asset, such as when the company’s share price is down or when there is a sudden change in
Types of Financial Assets
Some common types of financial assets are: certificate of deposit, stocks, bands, and cash and cash equivalents.
A certificate of deposit (CD) represents the amount of money of an investor deposited in a bank in exchange for an agreed interest rate. Usually, this type of financial asset comes with a higher amount of interest rate since the money is set to remain intact throughout the contract period. In case the investor
doesn’t complete the terms, there will be financial penalties that include losing out on the interest payments.
Stocks and mutual funds are another popular type of financial assets. Unlike CDs and insurance policies, these assets do not have a specified ending date and can be kept until the shareholder decides to liquidate it. With stocks, the investor becomes “part owner” or shareholder of the company. They get a share in the company’s gain and loss.
Bonds are financial assets that are offered by the government or companies to raise funds for short-term investments or projects. The bond certificate states the amount of investment, the interest earned and maturity date.
But perhaps the most common financial asset is cash and cash equivalent. Cash includes all forms of monetary instrumentalities (paper and coins, money orders, and checks) both in hand and those deposited in a bank that are immediately available.
Cash equivalents are short-term investments that can be quickly liquidated. Some examples are money market accounts, US Treasury bills, and high-grade commercial paper.
Financial assets can be deposited and withdrawn in asset accounts such as brokerage account for stocks, bonds and mutual funds, savings/money market accounts, certificates of deposit, retirement accounts, and college savings accounts.
Accumulating financial assets is vital to ensure financial security in the future. Liquid assets are also important to weather financial emergencies that require cash or unexpected expenses. Regularly reviewing one’s net worth is a basic financial literacy skill for everyone. In fact, knowing your current net is the first step to financial liberty.