If I paid for it, therefore, it has a value. If it has a value, it must be an asset. This logic is too often use by several individuals. But what is the exact definition of an asset? Or should I write: But what is the correct definition of an asset? Paying $2,000 for a new TV wonâ€™t get you much than watching Lost on a bigger screenâ€¦ and maybe with better sound! But using the same $2,000 to buy an asset might make you rich someday.
An asset creates wealth, it gives the holder the opportunity to receive a positive cash flow months after months. An asset doesnâ€™t incur negative cash flow on a long term basis, it should create money, it should create cash flow. Therefore, buying more assets means getting richer and richer. This is why you have to focus on creating cash flow instead of watching Evangeline Lilly on the beach. Mind you, you can probably do both!
All investment types are definitely categorized as being assets but they are more. As it is not the asset itself but the usage of it that determines what is an asset, everything can become valuable at a certain point. A property can become an asset if you rent it out or if you are buying and selling property to make capital gain. The property you just bought will be more likely an asset as the purpose is to make money differently than with a regular salary.
Companies, side lines and other forms or entrepreneurship represent assets as well. Even websites can earn income and therefore become more than a hobby. Those assets however, require periodic investments that will decrease your monthly cash flow. It all comes down to the return you get on your money.
Making the difference between goods and assets is fairly simple. However, acquiring them is sometimes a lot more difficult. Try to breakdown your balance sheet and pull out your assets. Unfortunately, most people donâ€™t have many of them.
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