An asset in personal finance is a resource of value or value with a future benefit, which can be converted into cash. Personal assets are things of present or future value – owned by individuals or a home.
Personal assets include cars, homes, collectibles, etc. Personal assets also include investments such as bonds, mutual funds, retirement plans, stocks, etc. However, in order to manage one’s money efficiently, it is important to understand the importance of two types of assets – appreciation and depreciation of assets.
Both asset appreciation and depreciation serve a purpose money management is, so individuals need to know how to use each effectively. Here’s what you need to know about asset depreciation and depreciation:
Appreciating assets are those that increase in value over time. Investing or giving away money in a valuable asset can be a major driver in increasing one’s wealth. However, the owner needs to realize an increase in the asset’s value in order to revalue it at a higher price—which provides significant gains over the long term. An asset may appreciate due to an increase in demand, supply or interest rate.
Some of the most common appreciating assets are stocks, bonds, real estate, REITs (real estate investment trusts), savings accounts, private equity.
On the other hand, depreciable assets are those that decrease in economic value over time and with use. Some of the most common depreciable assets include cars, furniture, equipment including computers and electronics, machinery, sports gear.
Even though property damage values tend to depreciate over time, there are a few key reasons why they are important. According to experts, these properties are said to offer tax benefits.
“After reading about asset appreciation and depreciation, one may wonder, what benefits does a depreciating asset give me? Why should I even invest in it? It is true that you sell the asset due to a decrease in the market value. But this is not always the case, especially not in the case of depreciation of assets. It is about the opportunity cost, or the value that these assets give you.
Let’s say you live in a subway and have to go 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 depreciable asset, it will not affect your purchase decision.
Other factors can influence your buying decision, such as how much the car will cost you, a cost benefit analysis, your intention to buy the car, if you are a regular traveller it can provide convenience,” said Ms. Snigdha Chaturvedi Explained, personal finance blogger at Nasdaqnark.