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Are you someone who realized that you are losing out on your hard-earned money despite having a wide range of assets? Don’t worry, you are in the top 5% of people who realized the problem before it’s too late. The path from here is less problematic if you understand that what you think is a minimal issue is the ones that grow out to be a gigantic hurdle later on.
Let us understand how to tackle this gigantic hurdle called “Depreciating Assets” on the path to financial success!
Table of Contents
1.) Understanding Appreciating and Depreciating Assets
2.) Impact of Depreciating Assets
3.) Depreciating Assets We Ignore
4.) Buying Property Through Debt
5.) Growing Assets – Be Careful!
6.) Conclusion
1.) Understanding Appreciating and Depreciating Assets
Before going further, let’s be clear about what are appreciating and depreciating assets.
Assets that increase our net worth day by day are growing assets. Assets that reduce our net worth due to depreciation are depreciating assets.
Examples of growing assets include stock investments, Mutual Funds, and real estate investments. These have a high chance of increasing in value in the long term. Examples of depreciating assets include cars, cell phones, electronic devices, and home interior decoration. Their values are generally declining all the time.
2.) Impact of Depreciating Assets
Do you want to know the impact depreciating assets have on preventing your net worth from growing?
Let’s say you are buying a new car on loan. You only have ₹5 lakh in cash to buy a car worth ₹15 lakh. You take another ₹10 lakh from the bank at an interest rate of 8%. That is,
Car price = ₹15,00,000
Cash balance = ₹5,00,000
Total loan amount ₹10,00,000
Interest rate = 8%
Loan period = 60 months
EMI = ₹20276
You have probably only seen the calculations mentioned above so far. Most people decide to buy a car based on this alone. Are these calculations enough to make a decision? Can the right decision be made based on this alone?
Also, look at the following calculations carefully.
Average lifespan of a car = 10-12 years (or) 2,50,000 km – 3,00,000 km
Let’s see what your total expenditure is within 5 years of the car loan being repaid and what the value of the car is that you think of as an asset at the end of 5 years.
Total expenditure amount = ₹5 lakhs + ₹10 lakhs (loan) + ₹2.16 lakhs (interest) + repair & maintenance cost + insurance
The total expenditure will have at least reached ₹20 lakhs. Insurance companies say that the value of a car will decrease by 50% in 5 years. Based on this, if we look at it, the total expenditure for the car is ₹20 lakhs. The value of the car at the end of 5 years is only ₹7.5 lakhs.
As a result of investing in a depreciating asset, you incur a loss of ₹12.5 lakh!
Let’s say someone invests the same amount in an Equity Mutual Fund SIP. That is, he invests ₹5 lakh as an initial investment and also invests ₹20,276 per month as an SIP. At the end of 5 years, with a return of 12% on investment, the value of the Equity Mutual Fund investment will have increased to ₹25.60 lakh.
In the case of a car, which is a depreciating asset, the value is ₹7.5 lakh. But in the case of an Equity Mutual Fund, which is a growing asset, the value has increased to ₹25.60 lakh.
The above calculations have been given to make you aware of the impact of depreciating assets and the value of growing assets in your investment strategy. It is up to each individual to buy car-like depreciating assets depending on their needs, lifestyle, and convenience. However, it is important to decide how much you can spend carefully, keeping in mind that it is a depreciating asset when you buy it.
It is also important to consider whether the allocation for growing assets is comparatively high.
3.) Depreciating Assets We Ignore
Interior Decoration
The cost of interior decoration for a house is often included in the cost of buying the house, and it is also considered an asset in the minds of many people. Approximately, ₹10 to ₹20 lakh rupees are spent on interior decoration for a 1000 square feet house.
If you sell the house in the future, you cannot sell the interior decoration cost as part of the value of the house. For example, you buy a flat worth 1 crore for 1000 square feet. You spend ₹20 lakhs to decorate it. After 5 years, you plan to sell the flat. The flat without interior decoration is being sold in the market for ₹1.3 crores. The price of your house with interior decoration will be almost the same. You cannot ask for an additional price for the interior.
The buyer may not like the interior decoration we have done and may want to change it, so we cannot specify a separate price for it. Therefore, it is necessary to have a clear perspective to see the house as a growing asset and interior decoration as a depreciating asset when buying a house. The expenses should be reduced accordingly.
Electronic gadgets
Many of us upgrade our phones and laptops often. Do you think it is necessary?
Everyone knows that these types of electronic devices lose asset value more than cars. Even though we know this, why do we keep upgrading them? A social driving force has been created by commercial organizations that, it is the right thing to do! An illusion has been created that you will only get social recognition if you constantly upgrade your gadgets.
4.) Buying Property Through Debt
It is important to remember that when you buy assets through debt, you are paying more for the asset through interest. Apart from taking a home loan for a living, you should avoid buying other assets such as interior decoration, cars, and electronic gadgets through debt.
When you invest in a growing asset, compound interest works in your favor. When you take a loan, compound interest works in favor of your bank and works against you. Always Remember that compound interest, which is considered the eighth wonder, should be invested in growing assets to work in your favor.
Depreciating Assets and Social Recognition
Depreciating assets are often those that showcase our vanity. Depreciating assets are there to show off our status. People fall into cars, interiors, and phones even though they are depreciating assets because of the attraction of vanity.
One person starts a SIP with his first month’s salary after joining a job. How many likes and shares will he get if he posts it on his social media?
Instead, he buys an iPhone with his first salary. How many likes and shares will he get if he posts it on social media?
This social driving force is what makes us run behind the mirage of depreciating assets.
What is a good home in reality? A home without debt, hatred, and illness is a good home. Debt occurs when you frequently buy flashy depreciating assets. Flashy depreciating assets stimulate the mind of our neighbors and develop jealousy and hatred. Moreover, cell phones, laptops, and smart TVs also damage our health.
We are turning our good home into a bad home by putting a curse on it at our own expense. Shouldn’t we wake up now?
5.) Growing Assets – Be Careful!
You may already have a basic understanding of growing assets and depreciating assets. But do you want to take that understanding to the next level? Only with a deep, intrinsic understanding can you make clear decisions about what kind of growing assets to hold to increase your net worth every year.
Some growing assets may appear to be growing on the surface, but they are depreciating on the inside. This is not visible from the outside.
A real growing asset has earned more profit than inflation after income tax. Any investment that has not earned more profit than income tax and inflation is a depreciating asset.
For example, someone invests ₹1 lakh in a bank FD with an interest rate of 8%. He gets ₹108,000 at the end of the year. If his income tax slab is 30%, he will pay an income tax of ₹2,400 on the interest amount of ₹8,000. After deducting the income tax, he is left with ₹5,600. If the inflation rate is 6%, our investment has lost its buying power by ₹400.
But the ₹1 lakh invested, appears to have grown to ₹1,08,000 and then ₹1,05,600 in our mind. It creates a false impression that our investment has grown. It is good to avoid such investments that appear to be growing assets on the surface but are depreciating on the inside.
6.) Conclusion
In this context, Equity Mutual Fund schemes have been a boon for investors who invest for the long term. They earn more profit even when taking into account the factors of income tax and inflation, and thus, they are real growing assets. They increase our net worth!
Let us invest in growing assets that will truly increase the value of our assets and avoid the illusionary trap of depreciating assets.
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