How best to assess one’s assets? A quick glance at a brokerage statement might seem to provide a sufficient summary of someone’s assets, but reality can be more complicated. For one thing, most people own assets that aren’t listed on these statements.
We asked retirement planning specialist Nicholas Bunio, CFP, to discuss various types of assets and why it’s important for people to understand the varieties and values of the assets they own.
What Are Assets?
An asset is anything that has monetary value. That includes not only financial assets like stocks and bonds, but also real estate holdings, including the family home.
Valuable resources that aren’t in someone’s possession yet but that are due to them in the future can be considered assets, too, such as payouts from a life insurance policy or Social Security. “A Federal government worker with a pension that will provide income for decades; that’s an asset,” says Bunio. “It may not be stocks and bonds, but it can help you survive.”
Some seemingly non-financial possessions might be asset examples as well, including cars, collectibles, and occasionally even the assorted stuff that accumulates in attics and garages over the years.
“Anything that you could realistically sell is an asset,” says Bunio. “If, heaven forbid, something really bad happened—let’s say you’re out of work for two or three years, you need to sell something to get cash to survive—your car is an asset…your jewelry is an asset.”
Why Understanding Your Assets Matters
“Most people really don’t know what assets they have,” says Bunio. That knowledge gap can lead to financial missteps involving…
Retirement timing: If someone doesn’t know how much they have, they might not know when they have enough to retire. “They could end up working four, five more years,” says Bunio. “And they didn’t have to.”
Estate planning: Someone who doesn’t understand the value of his or her assets could accidentally divide up their estate unevenly between heirs or fail to inform their heirs that certain easy-to-overlook items in the estate should be sold, not discarded.
If trusts are created, an incomplete understanding of one’s assets might lead to certain assets not being added to those trusts. For some high-net-worth families, a lack of understanding of assets could even have estate tax or inheritance tax consequences.
Insurance: Certain assets might not be fully covered by a standard homeowners insurance policy due to their value. Example: Jewelry worth more than a couple of thousand dollars often isn’t covered unless a rider (also called an endorsement or amendment) to your policy is added.
Divorce and prenups: Someone going through a divorce could easily end up with less than his or her fair share of the household’s wealth if they don’t understand the value of both their assets and their spouse’s assets.
Similarly, someone creating a prenup or postnup needs to know which of their possessions have significant value. “I have several clients who are about to get married to their second spouse, and they don’t know what they have, what the boyfriend or girlfriend has,” says Bunio. “Hopefully the marriage stays together 50 years, but if it doesn’t, and that prenup is wrong, that could turn into a huge legal headache.”
Money crunches: Not knowing the value of possessions could lead to less-than-ideal financial decision making if someone suddenly finds themself saddled with unexpected bills and needs to come up with cash fast.
Main Types of Assets
Asset classifications include:
Tangible Assets
These are assets that you can physically touch. Your house and car are tangible assets, as are your jewelry, collectibles, art, gold bars, and any other physical items that you could sell.
“A lot of stuff that we accumulate over the years in a desperate situation, we could sell,” says Bunio. “Even clothing, if you have $10,000 worth of Armani suits or something, you could conceivably sell those at a consignment shop.”
Intangible Assets
Intangible assets are things that you cannot physically touch. These might include copyrights, patents, and royalties. It also includes most mainstream financial investments. “Your stocks and your bonds are intangible,” says Bunio. “You can’t touch them—especially these days; most people don’t have stock and bond certificates.”
Liquid Assets
These are valuables that are either cash or that can be converted to cash quickly and reliably.
In addition to money held in checking accounts, savings accounts, and money market funds, a liquid asset list includes most stocks, bonds, and mutual fund shares. “You can go into your Vanguard account, or wherever, and sell the shares and three days later the money’s in your bank account,” says Bunio. “To me, that means it’s very liquid.”
Fixed (Illiquid) Assets
Fixed assets are valuables that typically take a meaningful amount of time to convert to cash. These include real estate, collectibles, vehicles, and small business holdings. “You can’t sell your real estate tomorrow and get a check for it in 48 hours,” warns Bunio.
Note that assets can change in liquidity, too. For example, if an asset can’t be sold for two years, it’s considered illiquid during that period. Once those two years are up and it can be sold, it becomes a liquid asset. So—liquidity can, and does, change over time.
Personal vs. Business Assets
The difference between personal assets and business assets seems straightforward—the former are owned by individuals, the latter by companies.
Unfortunately, this distinction can become muddled for some small business owners, with certain items being used for both business and personal purposes.
This “comingling” of assets is a potentially costly mistake that could have tax repercussions if someone is audited…or lead to personal possessions being lost if the small business is sued, defaults on a loan, or declares bankruptcy.
Small business owners should try to avoid using assets for both business and personal use, and/or discuss this topic with their tax advisors or attorneys. “Especially very small businesses, they end up mixing a lot of assets,” says Bunio. “And if something does go wrong and stuff is comingled, they’ve got a problem.”
Assets vs. Liabilities
When people picture their liabilities, they typically think of their debts, such as the amounts remaining on their mortgages, car loans, student loans, and credit card balances. Someone who’s calculating their net worth would do so by subtracting these debts from their assets.
But Bunio cautions that for retirement planning purposes, it often makes sense to include one’s expected future expenses as well as debts when estimating total liabilities.
A 60-year-old who has $4 million in assets and only a modest amount of debt might look at their net worth and conclude that they can afford to retire, for example. But if this person spends close to $1 million per year, they’re far from financially ready for retirement, unless they can dramatically reduce their spending.
“Too many people when they’re doing their assets and liability sheet just put down their mortgage under liabilities, and that’s it,” says Bunio. “But you’ve got to live, you’ve got to eat, and living expenses are liabilities.”
How to Identify and Value Your Assets
Most mainstream financial assets, such as stocks, bonds, and mutual fund shares, are easy to value—just check their share prices online.
Determining the value of other assets is often trickier. A real estate website such as Zillow probably can provide an estimated value for your home, for example, but online estimates like these can miss crucial details, such as the home’s condition.
“People come to me and say, ‘I could easily sell my house for $1.3 million,” says Bunio. “Well, yeah, if your home’s in great shape. But what happens if, when they go to sell it, the inspector says, ‘Oh, you have termite damage’?”
Determining collectibles’ values presents an even greater challenge. It doesn’t take termites to undermine the value of these; incredibly modest condition issues can have a massive effect on what they’re worth.
If it’s important to know the true value of such things, seek out a professional appraisal. “I would definitely seek out some sort of broker or valuation expert,” says Bunio. “A comic book that you say is in mint condition, if there’s one little speck that’s wrong, that could totally change the value of this comic book. An independent professional valuation is the way to go.”
What’s more, a valuation that was accurate last year might be far off the mark now. “Values can change,” says Bunio. “If no one wants comic books anymore, a zillion bucks in comics could turn into zero overnight. In 2008, if you wanted to sell your house, it wasn’t going to be worth what it would have been in 2007.”
