Saturday, August 26, 2006


Lesson 6: Assets

I talked about liability in my last post, today I am going talk about assets. A lof of people have mis-understanding about assets. I have a simple definition about assets, I consider something as your assets if it can generate income for you or potentially help you to earn money in future.A lot of us always think that by buying houses, they are actually building their assets, I would like to warn you that if you are planning to buy house for yourself to live and you are paying instalmentevery month for your mortgage, then that house is considered as your liability. You only can consider that house as your assets once you settle your loan/mortgage. However, if you are buying a house in order that it can be rented out so that you can generate income by getting rental every month, then you may consider that house as your assets provided your rental income is enough for youto pay your mortage.

I think for you to get your first million as young as possible and retire early, you have to build your assets. It is not necessary for you to use your money to buy assests because some assets can be created without costing you a cent. Keeping your money in your bank account can be considered as your assets as well because these monies can generate income ( interest) for you. However, to build your assets portfolio, there are a few terms you need to know, I would like to divide assets to two major types, real estate and personal property. Real estate, or immovable property, is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. For personal property, it can be your cash, stocks, mutual funds etc.

You need to know your financial goal when you want to build your assets,if you think that you are not going to need cash out your assest in short term, then you should be buying houses or land. These are good investment vehicle in long run and would give your a very good return in 10 or even 20 years time. However, the liquidity of these assets are very limited, meaning that you can not change them into cash in a very short period. The reason is simple, you have to find buyers for these assets( lands and houses) and since they usually cost more, you need to spend time to find the buyers.

On the other hand, if you think you need to cash out your assets in near future, I would recommendyou to buy/invest in some assests that are more liquid, these include mutual funds, stock markets or even keep your money in bank accounts. These vehicles of investment are highly liquid because you can convert them into cash in days or even hours.

Therefore, it is important for you to know your short term and long term financial goals.

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