Q: How can you tell if an asset is an investment?
A: The asset should meet either or both of the criteria below:
Increase in value over time
OR
Generate income for you
If it is not meeting either of these criteria, then it is not an investment. Investments are what we use to intentionally grow our wealth.
Let’s see an illustration:
Meet Jabari and Mwikali.
Jabari recently got a promotion and, with it, a pay rise. To reflect his change in status, he traded in his old car and bought a brand-new car for his personal use.
Mwikali also recently got a promotion and, with it, a pay rise. She decided to buy a car that will be used for taxi services. She has done her research and calculated estimates of how much she will earn each month and how long she needs to be in the taxi business for it to be profitable.
Let’s break it down:
- Both Jabari and Mwikali bought cars, which are classified as assets.
- Cars, by their nature, are depreciating assets, meaning their value decreases over time.
- Mwikali, however, bought the car with the intention of generating income.
- Therefore, the car is an investment for Mwikali, but not an investment for Jabari.
Dictionary:
Assets: Cash, or items you own that can be converted to cash (e.g., car, land, stocks, etc.).
Your Turn:
Take a moment to look at what you own and sort your assets into investments and non-investments.
What percentage of your assets is helping your wealth grow?