We’ve been exploring how to build personal wealth with appreciating assets, but might depreciating assets also play a role in your wealth journey? On the surface, it may sound counterintuitive, but let’s explore the circumstances under which a depreciating asset can help you build wealth.

Understanding the differences between appreciating and depreciating assets is crucial for making informed investment decisions. Appreciating assets are investments that typically increase in value over the time of their acquisition, like stocks, real estate, commodities, valuable art, etc. They are usually purchased as an investment strategy with the expectation that their value will rise over time, although their value might fluctuate over the short term. On the other hand, depreciating assets lose value over time; however, may serve essential purposes in your daily life. Knowing how to effectively balance both types of assets is key to creating a strong financial future. While appreciating assets are necessary for wealth-building, there is still value in holding depreciating assets, given their functions and ability to indirectly contribute to wealth creation.

How depreciating assets work

The most common example of a depreciating asset is a car. Now, while there is a small percentage of cars that can, in fact, gain value with time — classic cars, for example — cars usually lose value the moment they leave the dealership. In fact, it is estimated that a car can lose as much as 20 per cent of its value after the first year and 15 per cent per year every year after that. This means that if you purchased a car for $1.5 million, it might be worth only around $ 627,407.50 after five years.

However, this doesn’t mean that depreciating assets are worthless. While depreciating assets are not ideal for direct wealth generation, they can still play a strategic role in your financial journey. Leveraging your car for additional income is an effective way to make a depreciating asset work for you. Ridesharing, food delivery, or renting out your car are avenues that can turn an asset that’s declining in value into one that generates cash flow and ultimately wealth. Another way to leverage depreciating assets is to use them as collateral for loans that can be invested in appreciating assets. For example, using a car as collateral can help you access funds to invest in a rental property, which could then appreciate over time, creating an indirect benefit from the depreciating asset. This approach can also apply to other items like machinery, equipment, or electronics that may depreciate, but can still provide leverage for better financial opportunities.

Not all assets will appreciate

While they may not be good stores of value, depreciating assets are still necessary for their functionality. For example, given the challenges of public transportation in Jamaica, the convenience of a car often outweighs its depreciation, especially if it affects your productivity or quality of life. Similarly, owning electronics like a high-quality laptop or smartphone, although depreciating in value, can increase your efficiency and productivity. The convenience and productivity benefits of such assets can justify their depreciation, especially when these assets help you create income or achieve other personal goals.

Minimise losses from depreciating assets

If your goal is to make the most of a depreciating asset, consider these strategies to minimise losses.

•You can manage financing options wisely so that it aligns with your goals. For example, with shorter-term loans you can reduce interest costs, build equity, and maintain a higher resale value for your depreciating assets. Long-term loans may have lower payments but often lead to higher interest costs and less equity

•You can avoid unnecessary expenses by purchasing only what you can afford and truly need. If your car, for example, is for commuting or deliveries, consider a reliable and affordable option rather than a luxury vehicle. Similarly, if your laptop is for simple work tasks, a standard model might suffice, rather than a high-end one with the best specs, which may be excessive for your needs.

• You can use your depreciating assets to generate additional income. For example, your car could be used for delivery services or transporting people, which could offset payments and turn the car from a depreciating asset into an income-generating asset. However, you need to ensure that you run the numbers to verify that the additional income exceeds depreciation, maintenance, and repair costs, to generate profit.

•You can decide whether to buy a new or used depreciating asset. While an older asset may be more affordable upfront and require a lower initial investment or less debt, higher maintenance and repair costs can offset these savings. Weigh these factors to determine the best option for you.

Bottom line

A successful wealth-building strategy involves understanding the role of both appreciating and depreciating assets in your financial plan. Making money work for you is a core principle of personal wealth and appreciating assets are a critical component in that strategy. However, depreciating assets can also be useful on your wealth creation journey, if you leverage them wisely. Consult with an NCBCM Wealth Advisor by sending an e-mail to ncbcapinfo@jncb.com to explore which financial assets might be right for your portfolio.

Kimberley Martin – Assistant Vice-President, Corporate Solutions, NCB Capital Markets Limited