In personal finance, assets are something containing value or are resources of value, with a future benefit - which can be converted into cash. Personal assets are things of the present or future value - owned by individuals or a household.
Personal assets include car, house, collectibles, among others. Investments such as bonds, mutual funds, retirement plans, stocks, etch are also included under personal assets. However, to manage one's money efficiently, it is important to understand the significance of the two types of assets - appreciating and depreciating assets.
Both appreciating and depreciating assets serve a purpose is wealth management so individuals need to know how to use each one effectively. Here's what you need to know about appreciating and depreciating assets:
- Appreciating assets are the ones which increase in value over time. Investing money in or owing an appreciating asset can be a key driver in growing one's wealth. However, the owner needs to realise the increase in value of the asset to revalue it at a higher price- which provides significant gains in long-term. An asset can appreciate due to demand, supply or an increase in interest rate.
Some of the most common appreciating assets are stocks, bonds, real estate, REIT (real estate investment trust), saving accounts, private equity.
- On the other hand, depreciating assets are the ones which decrease in economic value over time and with usage. Some of the most common depreciating assets include car, furniture, equipment including computers and electronics, machinery, sports gears.
Even though depreciating assets loss value over time, yet there are some major reasons why owing these are important. These assets are said to provide tax benefits, according to experts.
''After reading about appreciating and depreciating assets, one might thing what is the benefit that a depreciating asset give me? Why should I even invest in it? It's true that you will not be able to get any monetary profit on selling the asset because of it's reduction in market value, BUT it is not always about that, especially not in case of depreciating assets. It's about the opportunity cost, or the value that these asset give you.
Say you live in a metro and you have to commute to work every day - you have two options ; either you take a cab or public transport every day or you buy a car and drive yourself to work. Even though a car is a depreciating asset, this won't impact your purchase decision.
Other factors might impact your purchase decision, such as the value the car will give you, a cost benefit analysis, your intention to buy a car, the convenience it might offer if you are a regular traveller,'' explained Ms Snigdha Chaturvedi, Personal Finance blogger at Nasdaqnarc.