I think it’s widely known that there are two types of assets: appreciating and depreciating. I think it’s less known what’s classified as appreciating and depreciating.
In this article, we will look at what each term means, examples of each, and how to use them effectively.
Appreciation is the increase in value. The majority of assets used to accumulate and grow wealth, appreciate. An asset can appreciate because of supply, demand, or a change in interest rates.
Depreciation is the exact opposite. It’s the loss of value. The most common example is a car, but more on that later.
- *Stocks – It’s commonly known that investing in stocks is the best way to not only keep pace with inflation but to grow your wealth. A stock is partial ownership in a public company. Popular examples include Apple, Amazon, Facebook, etc. (Click here to learn more about stocks)
- Real estate – Single-family homes, duplexes, apartment complexes, etc. Though the pace at which real estate appreciates dwarfs compared to stocks, it does so slightly over time. (Source)
- Private equity – This can be starting a company of your own or you can invest in a startup. There are also private equity funds that exist, as well. Basically, it’s a company or venture that is not open to the public (i.e. stocks on the exchange, etc.).
- Alternative – Less common assets that could appreciate (cryptocurrencies, precious metals, art, and other collectibles).
- Bank accounts – Savings accounts, certificates of deposit, etc. These don’t appreciate much, especially in the current “low-interest-rate”. Some may argue that you shouldn’t classify these as appreciating assets because inflation erodes away the purchasing power over time.
- Patents/Copyrights – Patents, other than section 197 intangibles, have a useful life of 10 years and can be amortized over that 10 year period. (Source)
What’s the point?
- Appreciating assets – Owning and investing money in an appreciating asset is the key driver in growing your wealth. Those who’ve accumulated significant amounts of wealth have done so by earning a living, saving, and investing diligently over decades.
- Depreciating assets – There are a few reasons to own a depreciating asset.
- Fun and convenience – We own and drive cars because we need them to go places. We buy boats because they are fun. In either case, you could also own a car or boat for your business, in which case it would serve a different purpose.
- Business – Owning and operating machinery and equipment is how many of us make a living or run a business.
- **Tax write off – If you use equipment, machinery, cars, etc. for business, oftentimes you can use the depreciation of that equipment as a tax write off. Financial advisors use a set of fancy calculations to come up with the tax benefits of depreciation, we won’t go into that here.
Appreciating and depreciating assets both serve a purpose. It’s important to know the difference between the two and how to use each one as effectively as possible.
*Stocks can sometimes experience periods of volatility and negative performance. During such periods, the value of such stocks may decline.
**Be advised: talk to your accountant about specifics.