What is the difference between appreciating assets and depreciating assets? Do you understand this concept? If so then it can drastically change your financial outlook. Not understanding it…or at least not respecting it, can leave you broke and living paycheck to paycheck.
It’s that important.
First off, here are the general definitions.
Appreciating assets are assets that go up in value over time.
Depreciating assets are assets that go down in value over time.
Appreciating Assets vs Depreciating Assets
An example of an appreciating asset would be a property bought for 100k that years later is worth 200k.
An example of a depreciating asset would be a car you buy for 20k and years later is worth 10k.
Now, both of these have their place in everyone’s lives but leveraging these to the best of your ability can be the difference between building real wealth or living a life under financial constraint.
In the short term it may not make a huge difference but 5-10 years from now it could be a life changing amount.
What are examples of appreciating assets?
Appreciating assets consist of:
- Housing or property
- Bonds and CDs
- Guns and ammo
- Gold and silver
- Other jewelry
- Stocks
- Cryptocurrency
- Intellectual Property (trademarks, copyrights, etc.)
Depreciating Assets consist of:
- Cars
- Recreational vehicles
- Clothes
- Furniture
- Computers and Electronics
- Toys
- Pets
- Sporting equipment, games, etc.
- Vacation timeshares
Now just to be clear, we’re talking here about generalities and consumer spending.
Yes, the list of “appreciating assets” listed above can go down in value, and yes the list of “depreciating assets” listed can go up in value.
In a general sense though, over time, the list of appreciating assets will go up while the list of depreciating assets will go down.
So if you want to build wealth, then look at the list above and only buy from the list of appreciating assets and never buy depreciating assets.
Ok, so it’s not quite that simple.
Depreciating Assets Can Have Their Place
We need to wear clothes. We kind of need furniture. Cars can get us to and from work or least get us from A to B much quicker than walking.
And we also need to have some fun in life of course, which means taking vacations or buying things we simply want but don’t need.
That being said, the important thing to understand is that depreciating assets are liabilities.
In other words, they aren’t making you any money, and are only taking money from you.
That car you bought and paid $400 a month for will be worth next to nothing when you’ve paid off your loan. Those clothes you purchased will be raggidy and unwearable in 5 years.
That being said, buying a vehicle for a business that keeps you in business and provides income for you would still have it’s place in making money.
Or even if that vehicle just helped you get to work.
However, with all of these types of depreciating assets (liabilities) the thing we should be asking ourselves if we want to build wealth is then what is the return from these, and how can we get by with the bare minimum.
Again, this is just if you want to focus on building wealth.
And nobody is saying these things aren’t worth buying, just that they are essentially the opposite of making wise financial decisions that can help you build wealth.
Now let’s look at the opposite.
Examples of How Buying Appreciating Assets Can Make You “Rich” That “Normal” People Don’t Think About
Examples really are the best way in my opinion to give a real visual on how these can make a difference.
So let’s give a drastic example.
A liability cost that many people don’t think about is having a pet. Having a pet costs money and returns you nothing (financially).
Don’t shoot the messenger. We’re just talking roi *return on investment) here..again not saying you shouldn’t have a pet.
It also may be odd to think of a pet as an “asset”, but it’s something you own, and it’s something that is a 100% liability.
Which, is why we’ll use it for the hypothetical example.
Hypothetical:
Let’s go back 10 years.
Person A buys a dog, the dog costs $100 a month (this is actually probably lower than what it would cost today).
Person B dollar cost averaged (DCAs) into Bitcoin every month the last 10 years. In other words every month they bought $100 of Bitcoin.
Person A after 10 years has nothing left from this expense.
Person B would have about $409,000 as of today from just randomly putting in $100 per month for 10 years. So an overall investment of $12,000 would now be worth $409,000.
Obviously Bitcoin was the best asset to buy the last decade so returns like this aren’t the average return.
The point is, it may not be $409,000 but it’s going to likely be at least $12,000 with the potential to be much more.
And this is just from a measly $100 a month, and isn’t considering if they bought more when the price dipped or sold when it spiked or anything like that.
Of course, this involves risk.
And most people choose option A and option B doesn’t even cross their mind because they see it as a risk not worth taking.
I put the list above (of appreciating assets) in order of safest assets to riskiest (in my opinion) with the exception being trademarks and copyrights as those are a bit of a different ballgame.
But just looking at assets you can buy, you can take different risks. More risk means more potential returns, safer means your likelihood of increasing value is greater but with limited potential.
Investing in index funds may bring a lesser return, but is proven over a long period of time to be a safe investment vs buying individual stocks/crypto/etc.
Maybe it doesn’t net you a near half a million on $100 a month but it is enough to start your own business.
This is the snowball effect.
Common FAQ about Appreciating Assets
Are home improvements considering appreciating assets?
This is a tricky question because your home is an appreciating asset, even with having to maintain it, but is spending money on your house worth it or is that throwing money away?
Well, this is going to depend on a multitude of factors, as markets all over the country vary quite a bit. And of course depending what type of work you’re doing on your house etc. etc.
That being said, a new roof for example will not only improve the value of your home but may also slow the rate at which your house depreciates. This makes it in a general sense a good investment.
Typically whatever you spend on your home you’ll get back dollar for dollar. If not even more. In fact more of a return is likely.
If it wasn’t you wouldn’t see people flipping houses.
But there’s a catch.
The question is how much will whatever upgrades you do to your house depreciate before you were to sell it?
In other words, if you put in new flooring and sell it tomorrow then this very well could give you a 2 to 1 return (arbitrary made up number as an example), where as if you put in new flooring and sell 5 years later it turned out to be a 1 to 1 return.
In other words, put in 5 grand and sell tomorrow and it helped increase your sale price by 10 grand. 5 years later these floors are beat up and worth less. Does that make sense?
So if we’re technically talking about investing to build wealth, then other than upgrades to your home that will prevent it from depreciating, you should logically not do anything to your house until you’re ready to sell, invest in other things that will increase in value more, and then right before you sell (or rent) do all of your upgrades that would increase your home value.
Of course, having a home to live in that you like and improves your mood may well be worth having, but again we’re just talking about building wealth and ROI.
Is Cryptocurrency Really an Appreciating Asset?
We just gave an example of how much Bitcoin would be worth over 10 years of DCAing into Bitcoin. This makes Bitcoin an appreciating asset, that being said we have no idea what the future holds, only speculation.
And within crypto and other cryptocurrencies besides Bitcoin, there is a lot of potential as well as a lot of risk.
For example, during the last bull run investing $10,000 into various alt coins could have netted you a million dollars…meanwhile they crashed after and your million you made could be worth 50 grand now. And many people bought the top and lost money.
These are speculative assets that I consider high risk/high reward.
Are Guns and Ammo Appreciating Assets?
I wrote more about this here, but over the long term, guns and ammo typically go up in value, some even on par with housing. And guns having a long life span makes them a rather “safe” investment.
The only thing here that could be an asterisk would be future political climates that could have an affect on these particular assets, other than that though, these have been proven to increase in value over time.
Most guns are built to have a longer lifespan than you or I, whereas ammo will be less but should still good for a good decade or so.
Summary
Investing in appreciating assets vs throwing your money away on depreciating assets can be the entire difference between being wealthy or not.
It’s important to consider this and understand what you spend your money on if you care about building wealth. Not only that, in business, many times it takes money to make money.
This is why tracking your net worth and tracking your assets is something everyone should be doing. It isn’t just the compounding interest you can earn from assets but the opportunities that it could open up in terms of making money.
Hence, the rich get richer and everyone else stays broke.
This is why understanding and respecting the concept of investing in appreciating assets is so important.
While in the short term it may not seem to matter, over time this is one of if not the primary difference between the wealthy and the poor.
What do you think? Is there something I missed here? Is there anything else you would add? Let me know in the comments below!