Know which assets will serve you best in your retirement future.
When we talk about financial fitness, one of the most important measures is the value of our assets. The problem is that we often have false expectations about some asset types, and we need to break those illusions to focus on our real financial condition.
Let’s first clarify the five different kinds of assets:
Clothing, furnishings, and jewelry fit into this category. Most of this stuff decreases in value to less than half what we paid for it before we even get it home.
This includes real estate, cars and appliances. Often they either appreciate over time or provide a fair value over their life. Loans that we have against them reduce their value – such as mortgages and auto loans. Subtract those, we get the net value.
Some employers still provide a pension. Since most companies under-fund their pension plans, we might discount the value of this asset, but it’s still an asset. In addition to the pension value, employability (the ability to work and earn an income) is an asset as well, and perhaps the most valuable one.
Although Social Security’s solvency is in question these days, unless it is eliminated entirely, we should still consider the value of this future income stream as an asset. It would be wise to discount it somewhat.
This is our 401(k) plans, individual retirement accounts, brokerage, mutual fund and savings accounts. This one usually gets the most attention, because when we have plenty in this category, we don’t need to worry about the others.
Ignore the Illusions
The first common mistake is thinking that our personal assets somehow contribute to our future security. Take a stroll through the Goodwill store, and you’ll see what those things are worth should you ever need to sell them.
Possibly the most harmful illusion, however, is that our household assets can become financial assets. This one is harder to break because past generations have done it successfully. Retirees sold their household assets in New York or Chicago or Los Angeles, gained enough financial assets and moved to Florida or Arizona.
This method doesn’t work as well for those who live in say, the great Midwest, where property doesn’t boom every year. And as we saw in the Great Recession, property values can be nothing more than a mirage.
To secure our financial future, the two primary places that we should focus on are employment and financial assets. There is no better way, at any point in our life, to improve our financial condition than to increase our earning power, which allows us to add more to our saving accounts.
So, if your monthly budget goes more toward personal assets than your financial assets, your focus is in the wrong place, and trouble is on the horizon. And if your household assets grow faster than your financial assets, you may also be heading for a problem, having to sell your home to provide funds to live on.
A sign that you’re in the right direction: your financial decisions revolve around increasing your savings. Keep up the good work. This is the type of asset that serves you well in the future.
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