Don't Think Like The Poor - Financial Freedom #3

Appreciating and Depreciating Assets

Today I'm going to teach you about depreciating and appreciating assets and why this is important to know. You may think you know all there is to know about it, however, even though something may appear to be simple and not worth your time, it can actually turn out to be quite significant and important to your financial freedom.

Split

I want to make this perfectly clear. If all you care about is money, again IF all you care about is money, you should spend 100% of your money on appreciating assets, and 0% on depreciating assets. What does that mean? Well appreciating assets are (in most cases) Real estate, certain types of art, studying, business, stocks and crypto. Of course all of these items have a higher or lower risk/reward profile. Depreciating assets: Food, Clothes, most Cars, boats, planes etc. These items usually drop in value.

Essence

In essence this means that every dollar you invest in a depreciating asset is gonna be worth less a year later. Every penny invested in an appreciating asset should be worth more after a period of one year has passed.

You Only Live Once

Of course you cannot invest all your money in appreciating assets. First of all, you have to eat. Every bit of food you buy will loose almost 100% of it's value as soon as you chew and swallow it. Yet I dare you to go one or two days without. Therefore a 100% - 0% split is simply impossible. However, if you can try to aim for a 40% - 60% split. Try to work towards a financial position in which you are spending 60% of your money on depreciating assets (as in: you loose that money) and spend the other 40% on appreciating assets (as in: you invest that money for the future). As your investments will start to pay off, the total amount will grow and you will be able to 'waste' more money.

Poor Mans Thoughts

Now here's the thing. Poor people invest almost all of their money in depreciating assets. They really want that television, watch, or motorbike. They do not realise that owning a whole heap of stuff that is loosing value is one of the worst ideas if you want to become more wealthy. The trick is to rent stuff that loses value, and invest the money you would have otherwise spent on them wisely, earning a higher percentage of interest than the lenders ask for your item, therefore creating leverage. Or, even better, not possess those depreciating items in the first place.

All Debt and Pay-Off Schemes are Bad!

Let me give you a nice example of not owning assets that are depreciating, like cars. If you live in the U.S. you may be used to buying things on credit and leasing a car. Here in Europe it is less common.

"If you have to lease a car, you cannot afford it"

How many times have I heard this? Save the money first before spending it! Such a poor mans thing to say, yet everybody believes it. Let's have a look at the facts shall we:

Let's say I wanted to buy an Audi S1, sports hatchback. Current list price in The Netherlands is €48.800 however let's say you want some options which are expensive here and we end up at €58.000. Now according to the geniuses of money: you have to save the money first. So let's do that, subtracting yearly wealth tax @ 1.3% I will leave inflation out of it.

You will save €1.000 per month:

Year	Saving money - 1,3%	Investing Money @ 6%
1	11856	11856
2	23856	24567
3	35569	38041
4	47142	52323
5	58577	67463

So just by saving this money for the car, instead of investing it you are already losing almost €10.000 before you even bought the car! Critics will say you can also invest your way up and then buy, yet keep in mind this money will most likely have been 'invested' in a prior car. If you invested in something that offers a 6% return it may be real-estate or stocks and the money may not be readily available.

Additional Calculations

The costs for this car according to Autoweek are €801 per month in depreciation, road tax, insurance, and maintenance for a 4 year period @15.000 km per year.

Now keep in mind, buying the car you lock all your money up in that car, so you are paying the €58.000 first, and then paying the 801 per month additionally. This means you cannot use this €58.000 to invest whilst owning the car. And therefore loose another 6% times 4 years on that. You do however not have to pay the wealth tax according to current laws. Summing that up v.s. a lease: even at the worst prices I cannot spec it higher than 850 per month, but let's just say it is 950 to keep things interesting, again @15.000 km per year for 4 years:

Rates	Purchase	Lease
Montly Costs	€322	€950
48 Monthly Costs:	€15.456	€45.600
Purchase Amount:	€58.000	€0
ROI on Investment:	€0	€15.223
Depreciation:	€22.992	€0
Money Left after Sale:	€19.542	€27.623

This means that, though both not very good investments the lease option is WAY better, even though I added over €100 a month as a downside just for fun. Therefore do not believe everybody on their word if they say, it's bad to lease, it shows you cannot own.

Keep In Mind:

I just picked this car because I kind of like it. You always have to look at specific examples, in your specific situation, country, tax system, banking system etc. It just goes to show that not everything turns out to be as it appears to be when calculated. Very counter—intuitive in my opinion.

Conclusion

Owning a depreciating asset can be very harmful to your savings even though renting a depreciating asset make look even more stupid, it is usually the cheaper option because you get to invest the money you would otherwise have to put down. Therefore. Don't lock your money up in depreciating assets. Rent stuff that loses value, invest in stuff that becomes more valuable over time ;)