Assets 101 - A Basic Primer

For the purpose of this blog post I’m going to break down Assets into two broad categories, discuss the basic attributes and the role each plays in your financial life. This might be a bit elementary but I’ve found that people generally appreciate a refresher on the basics.

Assets fall into two broad categories: Savings & Investments.

Savings

Savings are generally short term liquid capital type assets. Some examples are:

• Cash

• Savings, Checking, Bank CDs

• Money Markets

• Cash Value Life Insurance

What do we like about Savings types of assets?

• Liquid - accessible when we need it

• Safe - usually can’t lose money and/or is guaranteed

• Peace of Mind - creates a foundation for our financial plan so we can sleep at night

What don’t we like about Savings?

• Low interest - we don’t earn much on this type of money relative to other assets. Tends to lose out to inflation over time.

What is Savings good for?

• Emergency Funds - money at the ready to bail us out when life happens

• Opportunities - Cash is king as they say and when you have cash on hand you can take advantage of opportunities that present themselves.

• Short Term Capital Needs - short term goals or sinking funds for expected purchases in the near future.

• Gives us psychological clearance to stay invested with our other long term investments when volatility is occurring like a market crash, recession or other external event.

Investments

Investments are generally long term assets. Some examples are:

• Stocks, Bonds & Mutual Funds

• Investment Real Estate

• Business Interests

• Commodities, Collectibles & Art

What do we like about Investment types of assets?

• Growth Potential - opportunity to outpace inflation over time. This is the big reward people are after - Rate of Return.

What don’t we like about investment types of assets?

• Risk - investments can lose some or all of its value depending on what it is.

• Volatility - values can fluctuate over time and might not be optimal at the time you need it.

• Lack of Liquidity - some investments like real estate or businesses or retirement accounts can lack liquidity or access to the funds when we need them. If forced to liquidate at a bad time we usually lose money in situations like that.

What are Investments good for?

• Long Term Growth - the goal is to grow our money over time. This is important to outpace inflation so we don’t lose too much spending power.

• Retirement Savings - since retirement is usually a long term goal, using investments is the opportunity we need to grow our money.

• Financial goals 10 or more years out - short term goals should use “savings” type assets but long term goals can be “investments” giving you more potential for growth.

Savings vs. Investments

Sometimes a client will ask me what asset is best. The answer is always “it depends on the goal.” Having sufficient short term liquid assets (Savings) works well with Long Term Investing strategies because it gives you “permission” to stay invested for the long haul. Where people get into trouble is they are too one-dimensional. If everything they have is in long term illiquid investments and a crisis occurs - they usually lose money, drive up their taxes and compound the crisis. If everything they have is in savings type assets then they lose too much purchasing power over time due to inflation and depreciation of the monetary unit.

The key is to have the right balance of both. Personalized 1:1 coaching can help you determine what is the right mix of savings type assets and investment type assets for your values and goals. Financial Excellence is all about balance, control and confidence. Visit www.myfinancialexcellence.com for more uncommon knowledge about money or contact keith@myfinancialexcellence.com for information about 1:1 coaching. Your fist coaching call is free and you can decide if you want to enroll at that time!