When it comes to building wealth, your assets play a major role. As a rule of thumb, appreciating assets help build wealth. Depreciating assets, on the other hand, do the opposite and may hinder your ability to reach your financial goals.

This begs the question: What exactly are depreciating assets and how do they affect your wealth?

In this article, we’ll take a closer look at both depreciating and appreciating assets so you can make well informed choices on your journey to financial prosperity.

Appreciating Assets

True to their name, appreciating assets are assets that typically appreciate in value over time. Some produce incomes. Others might simply continue to increase in value until they are sold.

Some examples of appreciating assets include:

• Real estate – With real estate prices climbing steadily for a decade and soaring over the past year, real estate deserves a spot on any appreciating asset list. Of course, real estate can decline too, as was evident with the Great Recession from 2007-2009. But right now, real estate is appreciating.
• Stocks – Anyone who bought into Amazon at $100 per share will tell you the right stock could be a powerful appreciating asset for wealth building.
• Private equity – While often overlooked by those in search of assets that appreciate, a company or startup venture could be another example of an appreciating asset.
• Precious metals – Much like real estate, the price of gold, silver, platinum, and other precious metals tend to steadily increase over time.
• Alternative assets – Cryptocurrencies, art, and other collectibles are less common assets with potential for appreciation but they do have potential.

These are all great examples of assets that may appreciate in value over time. However, there is always a chance they may lose value or depreciate, too.

A Depreciating Asset

A depreciating asset is just the opposite — it’s an asset that tends to lose its value over time. Although many depreciating assets are liabilities and could hurt your ability to build wealth, some serve valuable functions and are necessary.

Some depreciating assets include:

• Cars
• Boats
• Equipment
• Electronics
• Furniture

As you could see from the list above, unlike an appreciating asset, many depreciating assets are necessary in life. The key is being smart in the way you purchase them.

Assets and Debt

Before we get into debt, which of the following is not currently depreciated?

a) Car
b) iPhone
c) Real estate

If you said real estate, congratulations! You’re absolutely right!

Now, for larger assets like real estate or a car, debt may be required for the purchase. So, if you want to build wealth, when should you purchase assets with debt, and when should debt be avoided?

To answer this, we have to put debt into two categories: good debt and bad debt.

Good Debt

Ideally, debt should only be used to purchase an appreciating asset or one that will yield a return greater than the interest rate you’re paying.

A mortgage is an example of good debt. You borrow the money knowing the property will likely appreciate in value. Interest payments on mortgages are tax-deductible, so that’s a benefit as well.

Student loans may also be considered good debt. Student loans usually have low interest rates and could be used to fund a future career with increasing income. Like mortgages, student loan interest payments also may be tax-deductible.

Bad Debt

Bad debt, on the other hand, is debt that’s used to purchase a depreciating asset. This type of debt should only be used when absolutely necessary.

Millions of people do it, but taking out an auto loan to purchase a car is a prime example of bad debt. A car is a depreciating asset and one that could easily depreciate faster than the time it takes to pay it off, leaving you underwater.

A Desirable Way to Purchase a Depreciating Asset

Going into debt to purchase a depreciating asset might be a costly decision. Instead, you should try to purchase a depreciating asset in cash.

So unless you have $45,000 in the bank for a new car, leasing may be an option to consider. In addition to avoiding going underwater the moment you drive off the lot, you may be able to save money by leasing a new car rather than buying one.

Research done by Edmunds.com shows you could save an average of $2,580 over six years by leasing a new compact SUV instead of purchasing one. These savings are from lower payments and don’t include routine maintenance costs. Keep in mind, however, when the lease ends, you won’t have any equity in the vehicle.

Bottom Line

If you want to build wealth, then you could focus on purchasing assets that appreciate in value. And conversely, you could avoid spending on assets that depreciate in value, whenever possible.

Regarding debt, you may only want to purchase assets that provide a greater return or appreciation than the amount of interest paid. Why? Well, at the end of the day, if your goal is to build wealth, then this means saving as much as possible to purchase the right assets. It also means being selective with your depreciating asset choices and how you buy them.