A key factor in wealth management is knowing how to use appreciating and depreciating assets in the right ways. Good management of both increases your time, money, and opportunities. Bad management, though, takes away from all three. To help you find the right balance, here's what you need to know.
What Are Appreciating and Depreciating Assets?
Everything you purchase generally comes in three categories: consumable, appreciating, or depreciating. Consumables get used up right away. Appreciating assets, though, tend to grow in financial value over time.
Sometimes this is a short and guaranteed rise, while others have a longer and wilder journey. Real estate often rises in value quickly while stocks, collectibles, or a business venture may take decades to grow.
Depreciating assets are things that begin to lose value as soon as you buy them. The most common example includes cars that lose thousands of dollars in resale value the moment you drive them off the lot.
How Can You Maximize Appreciating Assets?
Appreciating assets are obviously the most valuable. Taking advantage of appreciating assets means investing in things that have a strong likelihood of rising in value, including stocks and bonds, real estate, and financial accounts. These should take priority over depreciating assets.
Using debt to purchase appreciating assets — called leveraging — can be a smart move. When you purchase an asset whose rise in value is higher than the interest paid to borrow the money, you grow wealth when selling the asset.
How Can You Minimize Depreciating Assets?
Depreciating assets have their place in life. Some are unavoidable. The key to wealth management is to balance how and when you hold them.
One fundamental management technique is to avoid borrowing money from the future in order to pay for depreciating items. Many experts recommend you avoid carrying a credit card balance (from month to month) for anything that depreciates in value. Use current cash flow or past savings whenever possible.
Similarly, use depreciating goods to minimize lost opportunities to gain appreciating assets. You may, for instance, buy a second car so your spouse can take a job with a different schedule than yours. Their career is an appreciating asset, so the vehicle doesn't need to rise in value in order to help your family grow wealth.
Where to Start
Are you using both appreciating and depreciating assets to their best? Find out by meeting with a financial advisor in your state today.
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