An appreciating asset is an item whose value increases over time, such as property, investments, and shares. The value of an appreciating asset can increase due to demand, supply, or an increase in interest rates.
On the other hand, a depreciating asset is an item that costs less over time, such as a car or a laptop. A depreciating asset decreases in value because it has a limit in its useful life.
To put that into a nutshell: Investing in appreciating assets can be beneficial because they have the potential to increase in value over time. However, investing in depreciating assets can be risky because they tend to lose value over time.
So how would you invest your money, if you had the means, or a little windfall such as a bonus or inheritance?
As an example, let’s say you earn a bonus or inherit R100 000, which you choose to invest in a bond or money market account (earning approx. 5% interest) – After 5 years you have earned yourself a healthy sum of money, which can be reinvested.
Alternatively, you take the R100 000 and buy a car. Nice to have, but the depreciation is unavoidable. You will not get your money back, no matter how well you look after your car.
If you choose to invest in property – again this value appreciates, with the added option of renting out the property and getting a return on the investment, with immediate effect.
Spend on Hi-tech equipment? Thrilling thought, and who wouldn’t want the latest and greatest of gadgets…. But again, the cutting edge of technology is upgraded constantly, and your asset will depreciate in line with the speed of research and development.
Food for thought…
It’s worth giving your cash a “cool off” period, before deciding what to do with it. By then (hopefully) your excitement and impulse to spend recklessly is under control, and you can make more level-headed choices! By investing in appreciating assets, you can buy the depreciating assets, but have the assurance of returns due to your investment in the appreciating assets.
