The myth
A depreciating asset is something that loses its value as it becomes less useful, sees decreased demand, or turns obsolete over time. Some examples include cars, furniture, electronics, and items of clothing.
When you want to build wealth, people might tell you not to spend a lot on this type of asset. You may hear that it’s better to put money in assets with the potential to grow in value instead.
The reality
Consider this example to help you understand the difference between appreciation and depreciation.
Let’s say you received a bonus of P100,000. You decided to put P50,000 in an investment fund and use the other P50,000 to buy a brand-new smartphone.
After 2 years, the money you invested in a fund grew by 5% to reach a total of P52,500. Meanwhile, the phone you bought has become an old model and is showing signs of wear and tear from daily use.
To resell the phone, you’d likely need to lower the price by a lot. If you’ll wait for a few more years, your investment might grow further while your smartphone will continue to lose value and usefulness.
This example may suggest that investing is a better use of your money than an asset such as a smartphone. However, spending money on things that depreciate isn’t automatically bad.
Depreciating assets can still serve a valid purpose, like the following:
Reasons people buy depreciating assets
- Usefulness
Things like home appliances or a laptop might be necessary for your daily life or career. In these cases, spending could be justified because these items help you function better or earn money.
The same is true for entrepreneurs who buy machines and equipment for their businesses.
These purchases might break down or become obsolete over time, but they can also bring value that might make up for the cost of buying and maintaining them.
- Improved quality of life
People spend on “wants” that bring joy or comfort, even if they won’t give much monetary return in the future.
If new clothes, gadgets, or furniture can improve your quality of life, then it might be OK to occasionally enjoy the fruits of your labor without going over budget.
Though you likely won’t get back what you spent, the personal value these items bring can still indirectly help with your long-term goals. They may boost your productivity and keep you motivated.
Things to remember about depreciating assets
On the flipside, it may not be such a good idea to spend a lot of money on things that lose value quickly if it puts your financial health at risk. Keep these things in mind before buying a costly depreciating asset:
- Cost of maintenance and repair
Aside from the amount you’ll pay upfront, you should also consider any costs that a depreciating asset may require over the years.
For example, car owners must pay for fuel, parking and toll fees, insurance, and maintenance and repair services, among others.
Knowing the real cost of buying and owning an asset allows you to accurately assess whether the splurge is justified.
- Useful life
Think about how long you’ll enjoy the benefits that a depreciating asset brings. Will the asset still be useful in a few years or require replacement quickly? Will future versions, changing trends, or new technology make it obsolete right away?
You might end up regretting your purchase if it ends up in the trash after just a short time since it’s no longer useful or you’ve lost interest in it.
- Impact on your budget
If you’re not careful, spending a lot on depreciating assets can hurt your finances. Sometimes, people get into unnecessary debt just to buy things that eventually lose value.
Planning is important to keep you from buying impulsively and spending beyond your means, especially on depreciating items. It’s ideal to set a budget for big purchases and create a gameplan for how you’ll reach that amount.
You can also consider buying secondhand to save money, investing for a huge purchase, or saving little by little through a sinking fund.
Verdict: Partly true.
Spending a lot on depreciating assets can be a bad move if it slows or derails your progress toward financial goals.
There are cases, however, where buying certain depreciating assets can help improve your quality of life. They may even contribute to your wealth-building journey when used right.
You should evaluate the long-term value and utility of an asset before spending a huge amount on it. It’s also wise to plan for big purchases so they won’t have a huge negative impact on your finances.
