All posts from Sam
Sam in Stack That Money,

Guest Post: Understanding What REAL Assets are

Guest Post by our member Nancy 

Understanding What REAL Assets are

Well, I’m sure everyone reading this article knows what assets are. However, this article is to enlighten you all on what REAL assets are. Most of the time, it seems that we never try to turn on our creativity, especially when it comes to financial stuff, and rather go with the same traditional mindset that’s been thought to us years back. In my opinion, this is one of the major reasons for the financial instability a huge part of the world population is dealing with nowadays.

One needs to understand what a particular financial investment option, or the so called “asset”, have in store for them, and how it will affect their financial position, such as their cashflow, and so on. Everything that increases your net worth may be termed as an asset according to the word’s general definition, but may not be called a “real” asset.

What is a real asset?

So what exactly is a real asset (not talking about the standard definition)? Well, simply put, a real asset is something that improves your financial condition, makes you feel a bit more comfortable when you are going through your balance sheet, and results in a “positive” cashflow. You can probably say that I’m a bit too obsessed with taking care of the cashflow, but in reality, I just understand how important it is.

Normal asset vs real asset

The job of a real asset is not to increase the financial burden of the owner, but instead lower it. It doesn’t make the owner pay for its maintenance out of their pocket, and hence rather turn into something that demands spending money rather than making it. Instead, it pays for its maintenance, as well as leaves the owner with some income over and above all the expenses it makes them incur.

So, in short, a real asset is something that helps increase your “net income”, and not just “net worth”. Unfortunately, nowadays, the focus seems to be solely on accumulating more and more assets, usually the ones which simply increase the net worth, and not result in any income. This is the reason that for most of the people, acquiring more assets results in accumulation of more debt, which, in turn, results in financial instability.

Let’s look at the overall picture here. Firstly, one is buying assets he thinks will help strengthen their financial condition. However, they can’t afford to pay for them on their own, and resort to taking a loan instead. After getting the loan, they buy such assets. Now, they are required to pay for the maintenance and other such expenses of such assets, and on top of that, they also have to pay a huge amount as the loan EMI, which also includes a considerable amount of interest. So, what the acquisition of such assets has resulted into is more debt, more interest payments, more maintenance and other charges, more hassle to deal with for looking after the assets, but, NO income.

Does it actually make sense to go for such assets? Sure, they might appreciate in value, but what would it matter to you if you are not going to sell them at the right time anyway? Also, even if you buy an asset with a view to sell them for a profit, it isn’t really investing in an asset, but rather trading it. However, most of the time, all it would take is one wrong pick to end up losing all the profit derived out of such activities.

Why real asset?

A real asset, on the other hand, is something that will generate some income on a monthly or yearly basis. The income derived from it will help pay for all its expenses, including the interest payments on loan taken to acquire it. Furthermore, it will also leave the owner with a good amount of money, after all the expenses related to it have been taken care of.

Such assets seem to be the real deal in today’s rather challenging financial situations. They help produce a positive cashflow and passive income, things which always improves’ one’s financial stability.

Your car, apartment you live in, stock investments that don’t pay any dividends, and so on, are some of the popular traditional assets. On the other hand, real estate properties that generate a monthly income as rent, businesses that make a considerable amount of profit every year, investments that yield positive returns regularly, and so on, are real assets.

A final word

This is just a basic and general overview of what you need to know about acquiring the right type of assets. In order to actually follow it, you will need to educate yourself financially, and understand the importance of cashflow and other such important things.