Depreciation

When you buy a new car from a bond it immediately loses value after you drive it out of the bond. As you keep driving your nice new car it starts to wear out. The tyres wear out, the brakes start squeaking, boda bodas scratch the body, and the engine starts rattling. This gradual wear down of physical assets is called depreciation.

Most physical assets are subject to depreciation. The rate of depreciation depends on the useful life of the assets. A phone has a high depreciation because every other year there is a new model which renders your phone obsolete. A building depreciates slowly because it lasts longer.

So why I am boring you with depreciation on a Sunday?

Well, it is because understanding the different kinds of depreciating assets can help you make better purchase decisions. You should not pay so much for rapidly depreciating assets like phones and cars. Where possible buy assets which appreciate in value like land. If you buy a depreciating asset, it should generate additional economic value or utility which exceeds the depreciation cost. For example, a home is a depreciating asset but it provides so much utility to a family that it is worth the cost.

The depreciation cost is an estimate of the replacement and repair costs you need to incur to maintain an asset. So if you overbuy depreciating assets you are going to incur a lot of costs in repairs and maintenance.

People who don’t understand depreciation will floss around their shiny gadgets for all who care to see and admire. Little do they realise that they’re paying a huge price. Now that you understand depreciation, I hope that you will make better purchase decisions.