Personal Finance, Taxes 

Usefulness & Utility Trump Asset Value

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I was reading No Debt Plan’s post about how you should only by appreciating assets on credit when I came to two conclusions: there aren’t many appreciating assets and, given the first observation, an asset’s value has more to do with its utility than its resale value.

There aren’t many appreciating assets out there in the first place. Besides your house, I don’t think there are many things regular people buy that appreciate in value. Regular folks don’t buy art, rare stamps, or other exotic collectibles (the collectibles they do collect are often of dubious resale value and people collect them for the fun, or utility, they derive out of having the hobby) and even if they did, the prospects of those items appreciating are murky at best.

Asset value has more to do with utility than resale value. When I buy a car, I’m certain it’s a depreciating asset, but I buy it all the same because it provides utility. Economists will argue it provides as much utility as its value depreciates (otherwise, if it provided more then people would pay more for it, if it provided less then people would pay less for it) and they’re right. Remember that buying a car affords you the ability to widen your geographic reach. The most important reason for widening your geographic reach is that it increases your employment prospects (it also gives you more options when you buy more depreciating assets!). So, while you are buying an depreciating asset, it could be provided you with a job opportunity that earns you more than if you didn’t have the car.

Lastly, don’t call your car a depreciating asset, I’m pretty sure it hurts her feelings. 🙂

{ 3 comments, please add your thoughts now! }

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3 Responses to “Usefulness & Utility Trump Asset Value”

  1. No Debt Plan says:

    I agree to disagree to a point. I guess I should write another article called “Minimize buying depreciating assets on credit”

    A car is a depreciating asset. Fact. A $50,000 BMW not only costs more to finance, but depreciates faster, too. If you could find a $15,000 Toyota, or buy a used Honda for $8,000 in cash… that’s better.

    The bottom line is, financing anything costs you money. If you can have someone else pay for your asset (leverage) that ends up being worth more in the future, you’ve done a good deal. If it ends up being worth less, you were better off paying cash.

  2. fred@opc says:

    There aren’t many appreciating *hard* assets within the average Joe’s reach; but there are plenty of appreciating assets – stocks, bonds, mutuals, cds, etc. These soft assets allow you to purchase hard assets via a financial instrument, and there are many cases in which borrowing to buy them makes sense, the same way buying a house on credit makes sense (at least fundamentally).

  3. Lo. Price says:

    Though I disagree that for nearly everyone, buying securities on margin is a good idea, I agree with Fred that there are many ways of looking at things. If I can finance a car for .9% APR, the depreciation of the car doesn’t really matter- I’m probably going to come out ahead over paying cash (assuming the price is the same whether you pay in cash or finance, and it often is not), since inflation, in the form of my income going up to keep pace with other rising costs, will make it cheaper for me to still be paying for the car in 2-5 years.

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