Implications of Depreciation

Spending money wisely is hard. Spending our hard earned money on items that don't lose value due to depreciation is even harder. For the car owners among us, we know all too well that many assets depreciate over time. That is to say as time progresses, the asset becomes less and less valuable.

Before we move on let's define depreciation . Depreciation means to fall in value or worth. Some items depreciate more rapidly than others while yet others don't depreciate at all. Instead of depreciation, these items experience appreciation. That is to say these items appreciate, or increase value, rather than lose their value over time. One of the most notable examples of an asset that depreciates quickly is that of the automobile.

A friend of mine got in on the employee pricing promotion Ford had this past year. Having recently graduated from college, he was in need of a dependable vehicle for his 45 minute commute to work. He left the dealership with a brand new Ford Escape, equipped with a four wheel drive and all the other bells and whistles one could hope for. Having paid just $23k for his new brand new SUV, he walked away extremely satisfied. But once he left the lot depreciation started to kick. The value of his Escape has decreased each day since he bought the vehicle. The market value of his one year old Escape has dropped $2-3k since he first took ownership of the vehicle.

What can you do to avoid such rapid depreciation ? Well, in all honesty there is not much you can do. In the case of cars, maintaining low miles and frequently servicing the vehicle will help sustain the value of the vehicle. But even the most pampered vehicle will depreciate in value over the years.

Of course new vehicles are notorious for falling prey to depreciation, but not all assets depreciate. Fortunately, for retirement's sake, there are many assets that typically appreciate over time. We can generally think of appreciable assets as things we might invest in. For instance, on average the market of value of land tends to increase in value with time. Thus many people buy up real estate property with the intention of profiting from the sale of the property years down the road. Most retirement plans also include some degree of investment in stocks and securities because given time these assets tend to appreciate.

Understanding how depreciation works can help one spend their money wisely throughout their life. There are a couple of depreciation related questions one can ask before spending their hard earned money. Next time you think about a purchase, big or small, run through these questions in your head:

1. How long will this last? – Items that will be used over a longer period typically prove to be of more value. If it is something your going to get rid of in two months then what is the point of buying it now?

2. What will be worth in a month? Year? 10 years? – Items that fall prey to rapid depreciation won't be worth much of anything at all in the future. Make sure the sticker price today is an appropriate value in light of the items future market value.

3. Is it really worth it to me? – Just because something will depreciate to no value in year doesn't mean it can provide you with satisfaction. Decisions on how money is spent should be made with consideration to the true market value of the item as well as your expected satisfaction derived from the purchase.

Depreciation is a part of life. Inevitably, we all must buy items that lose their value very quickly – like clothes, groceries, and furniture. Doing your best to spend your money on good value items can help you stretch your money further, live a quality life, and avoid the traps of depreciation.
 
 
About the Author

Adam Smith is an internet marketer for 10X Marketing, a firm specializing in affiliate program management. For more information on fighting back against depreciation or getting out of a debt problem please visit OneMinuteMillionaire.com

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