Asset

Personal finance sorts assets by what they do for you. The groups below overlap, but each behaves differently when you need money or owe tax. A second split separates tangible assets you can touch, such as a house or a car, from financial assets, such as deposits, stocks and bonds, which are claims on a bank, a company or a government.

For a complete checklist, borrow the insolvency worksheet in IRS Publication 4681, which asks people to list everything they own at fair market value. Its categories run from cash and bank balances through real estate, vehicles, household goods, jewelry, stocks and bonds, collectibles, retirement accounts, pension interests, education accounts, the cash value of life insurance, security deposits and business interests. A household balance sheet built from that list will rarely miss anything.

For a balance sheet, value each asset at fair market value, not at what you paid. The IRS defines fair market value as the price a willing buyer and a willing seller would agree on when neither is forced to act and both know the relevant facts. It also notes that a value an appraiser sets for insurance isn’t fair market value, because it doesn’t reflect what a willing buyer and seller would pay.

That standard settles most questions. Investment and retirement accounts are valued at their balance on the statement date. A home is worth what it would likely sell for, and subtracting estimated selling costs gives a truer figure. A car is worth its private-party or trade-in value, which usually falls fast in the first few years. Furniture and electronics are worth what they would bring secondhand, often a small fraction of their cost. A private business needs an appraisal or a conservative estimate.

Value isn’t the same as cost basis. Basis is what you paid, adjusted over time, and it sets your taxable gain; value is what the asset would fetch today. The difference between the two is an unrealized gain or loss.

Assets also differ in how they change over time. Appreciating assets, such as diversified stock funds, land and many homes, tend to rise in value over long periods, though nothing guarantees a gain in any given year. Depreciating assets, such as cars, boats and electronics, lose value from the day you buy them. Income-producing assets pay you while you hold them: dividends from stocks, interest from bonds and deposits, and rent from property.

Many assets are more than one of these, and some cost money to keep. A home can appreciate, but it also brings property tax, insurance and upkeep that come out of your cash flow every year. That is why some people argue a home isn’t an asset. In accounting terms it clearly is; the useful point behind the argument is that an asset’s return should be measured after the costs of holding it.

A car bought with a loan shows the weakest mix: a depreciating asset financed by an interest-bearing debt, so both sides of your balance sheet move against you at once.

The tax code draws its own lines. For federal income tax, almost everything you own for personal or investment use is a capital asset, including your home, household furnishings and the stocks and bonds you invest in. Sell one for more than its adjusted basis and the capital gain is taxable, at lower long-term rates if you held it more than a year. Sell personal-use property, such as your home or car, at a loss and the loss isn’t deductible.

A few rules change the picture. Up to $250,000 of gain on a main home, or $500,000 for a married couple filing jointly, can be excluded under the home sale exclusion if you meet its ownership and use tests. Inherited assets usually take a stepped-up basis equal to their value at death. Investments inside a traditional 401(k) or IRA aren’t taxed when sold within the account; withdrawals are generally taxed as ordinary income instead, while qualified Roth withdrawals are tax-free.

So two assets with the same market value can deliver very different after-tax money, which is why asset location can matter as much as the investments you pick.

In a plan, assets do three jobs: pay for spending, absorb shocks and grow. Only some can do the first two on short notice, which is what liquid net worth measures. How you split them among stocks, bonds, cash and real estate, your asset allocation, sets the balance between growth and stability, and spreading money across many holdings limits the harm any one of them can do.

Protection is part of the picture. FDIC insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category, but it doesn’t cover stocks, bonds, mutual funds or annuities, even when a bank sells them. SIPC coverage restores missing securities and cash, up to $500,000 including $250,000 for cash, if a member brokerage fails; it doesn’t protect against market losses.

Finally, remember the asset you can’t list: your ability to earn. For a young worker, decades of future paychecks usually outweigh every account on the balance sheet, which is why disability insurance can protect a plan as much as any investment does.