An asset is something you own that has an economic value. Some of your assets may be converted into cash rather easily, while others may not. Your assets may fall into 3 broad categories:
– Cash & Cash Equivalent
– Lifestyle Assets
– Income Generating Assets
Having a strategic allocation of your resources is an important and critical part of your financial planning and wealth building process.
Types of Assets
Cash & Cash Equivalent
Bank deposits, Fixed deposits, Structured Deposits, Bonds, Cash Accounts etc, all fall under this category. These instruments are safe and usually provide a return of 0.5% to 3% per annum. However, they do not hedge against inflation.
Your home and its renovations, Car, Jewellery, Country club memberships etc all fall under this category. These are assets that depreciate in value over time. This class of assets usually does not help you in your wealth building process. They are consumption-based rather than accumulation-focused.
Income Generating Assets
Insurance, Hedge funds, Collective Investments, Stocks and Shares, Investment Properties, Mutual funds, High-yield Bonds, Acquired Skills (I will elaborate my skills as a Trader at the end & etc. This class of assets provide you with the potential of capital appreciation and/or streams of income through dividends and coupon payments. Keep building this IGA Portfolio and soon you will be able to achieve financial independence.
Type of Liabilities
A liability is a debt or burden that you have assumed, and which incurs an interest upon repayment. Too many liabilities may hinder your ability to create wealth. In other cases, they may even lead to bankruptcy. There generally exist categories of liabilities:
– Short Term Liabilities
– Medium Term Liabilities
– Long Term Liabilities
Short Term Liabilities
Study Loan, Credit Card, Hire-Purchase Account, Renovation Loan etc. These are some examples of short term liabilities. Those who are currently in Gen Y and those moving towards the age group of Gen X are the common people who fall under such debts. If you are not careful with them, such debt instruments can be stretched to become medium term liabilities.
Medium Term Liabilities
Car loan, Overdraft, Home Loan, Business Borrowings, Renovation Load etc, are some examples of medium term liabilities. Those who use them extensively are usually those in Gen X and those moving towards the Baby Boomer’s age group. If you are not careful in managing this category of debt instruments, they can be detrimental to your retirement dreams
Long Term Liabilities
Bank overdraft, Car loan, Mortgage Loan, Investment Property Mortgage Loan, Business borrowing etc, are some examples of long term liabilities. Those who utilize this category of debt instruments are the Baby Boomers, and in certain cases, Retirees. If you are not careful in using and managing these debt instruments, they may wipe out your entire financial security and retirement dreams. Many have gone bankrupt because of piling long-term liabilities which placed a heavy burden on their cash flow and ability to service those debts.
People borrow and get into debts for many reasons. If you did your sums and have borrowed for the sole purpose of wealth creation, you have incurred ‘good debts’ for yourself. However, if you have borrowed and got indebted solely for the purpose of enjoying a certain lifestyle or the purchasing of lifestyle assets, you are effectively trading your future freedom for immediate gratification.
Many who borrowed heavily to fund their current lifestyle always assume that their future income streams will be certain and stable. How wrong can they get? During the past economic cycles and downturns, we have learnt that one can lose his or her job or income rather unexpectedly. Finding a replacement job may not come as easily or as quickly as one would hope. Many are caught in a financially strapped situation during depressing times. Some have had their retirement dreams squashed. Others went bankrupt. Some even committed suicide. That is reality for you.
When you are burdened with too many liabilities, especially long-term ones, you are exchanging your rights to financial freedom for slavery to the financial institutions that have provided you with the loans. One of your goals is to eliminate all debts and liabilities as quickly as possible and embark on the journey of wealth creation and wealth accumulation towards financial independence and freedom.
I have learnt valuable lessons in using and managing debts and liabilities. Borrowing always seems easy in good times. However, if you are unable to repay those debts, especially during hard times, you may end up financially incapacitated or dead, i.e. bankrupt.
Do not over-gear or over-borrow. Do not short-change yourself – because your future is worth it.
No one plans to fail.
But many fail to plan
The rich believe that financial independence is more important than displaying a high social status.
Understanding your spending habits is key to managing your cash flow and the secret to successful financial management. Your ability to achieve lifetime success depends largely on your saving propensity, rather than your earning capacity alone. By and large, the 3 Financial Models: 33, 35 and 37 will describe how most people manage their income and cash flow. I will share more of these 3 financial models with you in MY NEXT SHARING.
“ASSETS FEEDS YOU; LIABILITIES EATS YOU.”