Key Takeaways
- Some assets appreciate over time: stocks, bonds, and real estate, for example.
- Other assets depreciate over time: cars, clothing, and furniture, to name a few.
- Time plays an important factor in the ultimate result.
Have you ever watched a really young child play soccer? Or rather, have you watched an adult try to coach a young child to play soccer? They have a limited amount of time to keep their players’ attention and try to accomplish what they set out to do. As the players age and mature, that attention span increases and those coaches have more time to impart their knowledge and instruction. That factor of time is important.
What does this have to do with assets appreciating and depreciating? Well, time is an important factor here as well. To shed some light on this, let’s examine assets that depreciate.
Stuff that depreciates: automobiles, furniture, boats, clothing, and toys, just to name a few. Where does time come into play? Consider the value of a new car versus a used car. You can save a considerable amount of money if you buy a car that’s a few years old instead of buying a new car – oftentimes they’re $10,000 – $20,000 less expensive. If you continue to buy used cars throughout your lifetime, that could add up to saving $100,00 – $200,000!
What about the appreciating side? These assets can include stocks, bonds, mutual funds, exchange-traded funds, real estate, and operating businesses. These are assets that can appreciate over time, with time being, once again, the important factor. Where people get into trouble with these assets is by not considering the amount of time they’re going to need to hold on to them.
For the risk markets, that being stocks, mutual funds, ETFs, or bonds, you want at least five years, ideally 10 years, to see appreciation. It gets tricky when you buy a home or a business. It’s like driving a new car off the lot – there’s an immediate discount when you do that.
When you sell a home, the cost is around 10% of the value of the home, depending on the situation. It can take five years before you can overcome that discount. The home needs time to appreciate, but inflation is only 3% per year, so that means you’ll need at least three to five years. This is why buying and flipping a house can result in little appreciation and might even result in depreciation.
What about businesses? When people start businesses, there are a lot of up-front costs and they don’t see a return on their money in the beginning. But if they run the business appropriately and work very diligently, they might get something out of that business after five or 10 years. When it comes time to sell the business, ideally, they’ll not only get the money they put into it, they’ll get compensated for the time and effort they put into it.
So, as you spend your hard-earned money, give some thought to appreciation versus depreciation and how long you’re going to hold on to those assets. The time element makes a big difference in what you’ll get out of them in the end. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy:
