Are Your Assets Costing You Too Much?
The more assets, the merrier is generally a good philosophy. But there are times when assets can actually be a drain on your financial wellbeing. Some assets cost a lot to possess and don't bring you much in return.
Consider whether these common assets are worth their weight.
A home can be one of your biggest assets. It can also be one of your biggest financial enemies. Ideally, you are making payments on your home, building equity, and increasing your net worth as you go. But often, homeowners find that their monthly mortgage payments are hindering their ability to make ends meet. To make matters worse, home upkeep and repairs, electricity, and other utilities may be costing you more than you bargained for. Homeownership is a great goal, but don't buy a home if it will make your life more challenging financially.
It may seem crazy to say that good old cash can work against you. But if you have a lot of it and there's inflation, over time it will lose value. It's great to have a healthy dose of cash on hand, but at a certain point it becomes smarter to invest your money in something with a higher rate of return. If you have large quantities of cash in bank accounts that provide a low interest rate, chances are you are making a financial mistake.
You can count an automobile toward your net worth, but you can virtually guarantee it's going to decline in value over time. Add in the cost of maintenance, gas, and insurance, and it's likely that a car is a true drain on your finances. But you need a car to get around, so it's best to look at the true cost of ownership before buying. This means taking into account fuel mileage, reliability history, and the cost of parts and labor.
Your Collectible Items
You've got a Van Gogh hanging in your living room. There's a Mickey Mantle rookie card in your man cave. Your jewelry collection would make Elizabeth Taylor envious. All of these valuable items are nice to possess, until you take into account the expense of owning them. From storage to insurance to the cost of restoration, high-end collectibles can be a financial headache. For example, according to a Wall Street Journal report, managing an art collection could cost you between 1% and 5% of the value of the pieces annually. You may cash in big time if you ever sell these items, but the cost of ownership is high and may not be worth it.
It might seem backward to think of your investments as a drain on your finances, but it can happen if you're not investing in the right way. Are you investing in things that will grow in value over time, or in low-risk things that may be outpaced by inflation? Do you own a property that's costing money to maintain but not bringing in revenue? Are you paying a hefty amount in fees and commissions? Are you paying a high-priced broker or accountant to manage things even though you can probably do it on your own?
Your Life Insurance Policies
Many people don't think of life insurance as an asset, but it can be under certain circumstances. Of course, it's only a good asset for you if you believe the eventual benefit will outweigh the cost. Many life insurance policies are simply not very good — costly premiums, and low payouts.
Your Intangible Assets
Sometimes you have assets that don't really bring you any monetary gain, but may cost you money to obtain or possess. One example of this is a copyright or patent. These are things that may require upfront costs in the form of research and legal assistance, but the financial gain is uncertain. A patent has no real value until you sell it or develop a product based on it. When you acquire these types of assets, it's important to come up with some plan for monetization. Otherwise, they are simply a vehicle for sunk costs.
If you run a business, any product you've manufactured but have yet to sell is considered an asset. But if you have too much inventory, that could be problematic. Inventory costs money to store. Some items might become obsolete or spoil, and result in no revenue. On the flip side, too little inventory can result in a lost sale. Smart business owners become skilled in inventory management, in which they can properly forecast sales to ensure the proper amount of product on hand.
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