What Are Depreciating Assets?
As they relate to personal finance, depreciable assets are physical goods that maintain at least a portion of their value for longer than one year, but for which the value declines with use and/or the passage of time.
For our purposes, the term value refers to resale value, as in, how much money will a buyer be willing to pay for the asset at a given point in time.
Specifically, depreciable assets include things like:
- Motorized vehicles and tools
- Equipment (heater, air conditioner, bicycle, etc.)
The Price Tag on a Depreciable Asset is Like a Tsunami in the Middle of the Ocean
In my experience the typical consumer only uses two factors when deciding whether or not to purchase a depreciable asset.
- How much does it cost?
- Can I afford the monthly payment?
In fact I would venture to guess that many consumers only consider the second factor.
In either case, using only these one or two factors to decide on whether or not to buy a depreciable asset is comparable to a shift taking place between two plates on the ocean floor of your financial future. The wave the poor decision creates may appear small while it's still far from your future, but when the tsunami arrives on the shore of your financial future it may arrive with such destructive force that no amount of your potential wealth will be left standing.
What most people fail to realize when considering the purchase of a depreciable asset, is that the amount printed on the asset's price tag often represents only a small fraction of eventual cost to their potential future wealth.
First, in addition to the amount printed on price tag, the mere act of buying a depreciable asset often inflates the cost. I call these point-of-sale increases, "Purchase Costs." These purchase costs include costs such as:
- Sales tax
- Extended warranties
- Shipping and handling fees
- Loan costs
- Finance charges
And speaking of purchase costs, here's something to gnaw on. What use would these purchase costs serve if purchased without the asset?
Second, in addition to the base price and purchase costs, many depreciable assets come with one or more ongoing ownership costs. These ongoing ownership costs include expenses such as:
- Energy (gas, fuel oil, electricity, propane, etc.)
- Depreciation (loss of value due to time and/ or use),
But wait, even if you were to take the time to calculate the total cost of buying and owning a depreciable asset (such as an automobile), for as much as the total cost might shock you, it's still just a small wave in the ocean of your financial future.
The Opportunity Cost Tsunami
Throughout this website I've been like Paul Revere riding my web-horse through the streets while screaming, "The opportunity costs are coming! The opportunity costs are coming!" Well, if you've ignored my warnings in the past, I hope for the sake of the survival of your potential future wealth that you will pay very close attention here.
To illustrate the tsunami effect of the cost of buying and owning a major depreciable asset, let's suppose you just purchased a new automobile with a price tag of $25,000 and you plan to keep it for 5-years -- at which point you figure you could sell it for $10,000.
Further suppose that you paid a 7% sales tax, purchased a $700 extended warranty, and you paid $5,000 down on the vehicle -- financing the rest at 8% for 60 months.
Finally, you estimate that your annual ownership costs will include $2,400 for gas, $700 for insurance, $360 for maintenance and repairs, and $130 for licensing.
If you plug the above variables into the time value money calculator, you will see that the average annual cost of buying and owning the car for 5-years would amount to $8,052.46 -- for a total 5-year cost of $40,262.30.
But that only covers 5-years of your need for an automobile. What about the rest of the time you will need a vehicle?
If you expect to repeat this car buying scenario every five years for the next thirty years, the time value money calculator reports a total 30-year cost of $241,573.80.
In other words, the cost to buy and own a $25,000 car for 30-years will add up to nearly a quarter of a million dollars. Actually ... it will cost you a lot more than that!
If you found a way to go without buying and owning this vehicle, and instead invested the $8,052.46 annual ownership costs into an investment earning 6% per year, the time value money calculator calculates that at the end of 30-year period your investment would have grown to ... wait for it ... $636,612.88 ($241,573.80 spent, plus $395,039.08 in lost interest earnings).
That, my friend, is the true cost of buying and owning a $25,000 car for 30-years.
But wait! Do you know what the actual difference is between having spent $241,573.80 and having $636,612.88 in your possession? It's a difference of $878,186.68 ($636,612.88 - -$241,573.80 = $878,186.68). Shut the door!
And remember, that's only one example of one depreciable asset! Imagine what the opportunity costs will add up to for all of the depreciable assets you will buy and own during the course of your lifetime.
Can you now see the ever-growing size of the wave that's bearing down on your financial future?
How to Earn Hundreds of Dollars Per Hour
Sure, you may not be able to get by without owning a car, but if you play around with the time value money calculator you will see that even small reductions in price, purchase and ownership costs for large-ticket assets can add up to tens of thousands of dollars in reduced opportunity costs over the long term.
In effect, this means that the time you spend researching the best deal for an essential, large-ticket depreciable asset can translate into an hourly wage equaling hundreds of dollars (a penny saved is a penny earned).
What's Even More Shocking Than the Opportunity Cost of Depreciable Assets?
Referring back to the car buying example, I can virtually guarantee you that your friendly neighborhood car salesman -- you know, the one that claims to care about you so much -- will never point out the true cost of buying and owning what he is selling you. But not because he is intentionally withholding this sales-killing information just to make the sale, but because he's likely not aware of these costs himself.
You see, what's even more shocking than the size of the powerful opportunity cost tsunami that's bearing down on the financial futures of the majority of consumers is the fact that most of us managed to go through 13-years of public education without ever hearing the term "opportunity cost." We were shown how to dissect a frog, yet told nothing of the dangers (opportunity costs) that might keep us from building our financial futures on the shores of a major fault line.
I guess you could say that the failure of our k-12 educational system to teach us the concept of "opportunity cost" left most of us to go through life walking around with our heads up our assets.