Friday, August 19, 2005
Hebrona: The five types of assets
By Bronx Hebrona
Mind Your Business
SOMETIME ago, I wrote here about the tree types of income--Active, Passive and Portfolio--and the desirability of having the last two if you want to become financially independent.
Incidentally, the different types of income come from different types of assets. Before I go on, let's not argue with accountants on the technicalities of the definition of an asset.
For personal finance purposes, let's agree to simply define an Asset as anything that puts money into our pocket.
The opposite, of course, is a Liability, which is anything that takes money out of your pocket.
For most of us, the main or only source of income is our job or employment.
In this case, we rely on the first type of asset: Ourselves.
Our physical self, which includes our physical strength and mental capabilities, is in a sense, "hired" by our employer for a certain fee per hour or a percentage of the sales we make.
The type of income that this asset produces is active income, as it requires us to actively work for the money that we get. If we are younger, this asset may have the potential to increase the income it produces by working overtime, or taking on jobs or "sidelines" that could augment our income.
Of course, getting promoted in our jobs would also lead to increased income through an increased salary. The other aspect of this type of asset, however, is its declining capability to produce income as the years go by. We all know that our capabilities to do overtime work and other sidelines, and our chances of getting promoted become less and less as we approach retirement age.
The second type of asset is Real Estate investment, or a property that produces a net cash inflow--that is, there's still money going into your pocket after paying or spending for the necessary expenses to keep the money coming in. An example of this type is a residential or commercial property that produces monthly income from rent.
If, after spending certain amounts on repairs, improvements on the property, mortgage payments to the bank and taxes, you still get a net cash inflow, your rental property is considered an asset. The potential of a property to produce more income through time depends on how well we manage it. An apartment, which is left to deteriorate through time, will soon command a cheaper rent than one that is newly painted or renovated and on which a garage is added. The improvements can also lead to a higher appraisal by the bank if ever you decide to sell or take a new mortgage on the property.
The third type of asset is a Business that produces net cash inflow. This includes, for instance, a sari-sari store or a farm, or any business, for that matter, that produces a net cash inflow after deducting your business expenses. A business, therefore, that causes a net cash outflow (more expenses than income) is still a liability by our definition, however the accountants may argue. Just like that with a rental property, the potential of a business to produce more income over time depends on how well we manage it. A business that is expanding or growing has a potential to increase the income it produces over another that is shrinking because of neglect or mismanagement. If you decide to sell it, a profitable business may also get a higher appraisal and may command a much higher price than when you started it.
The fourth type of asset is a Paper Asset, which is a paper instrument that produces income through dividends or interest for its owner. This includes a passbook that represents a high-yield savings deposit, a certificate of stock ownership in a profitable corporation or cooperative (that regularly produces significant dividends), or a bond certificate that entitles you to regular interest payments from the government. The income being produced by these assets is called portfolio income - that is, income from a portfolio of paper assets.
The fifth type of asset is a patent, trademark or a symbol of ownership of an intellectual property, which may also produce significant passive income through royalties. This is the source of income of inventors, franchisers, book writers, songwriters and singers. Except for our physical selves, the different types of asset have the potential to produce passive income, which could make one financially independent. The secret is therefore to spend our active days and years becoming financially intelligent, that is, learning to create or acquire assets and accumulating them through time.
(You may write Bronx Hebrona at P.O. Box 46430, Gen. Santos City 9500, or email him at binex@asia.com. He hosts Radyo Negosyo, a weekly radio program that promotes entrepreneurship and financial literacy, every Sunday at 9-10 am over DXBB AM (RGMA Superadyo) at 1107 KHz. He is President-Convenor of the Socsargen Financial Intelligence Network, Inc., which promotes financial literacy and entrepreneurship in the region)
For Bisaya stories from General Santos.Click here. (This section is updated every Monday)
(August 15, 2005 issue)
Write letter to the editor.Click here.
Join the Sun.Star message board.Click here. |
