MONEY TRAP - 13 : Too Many Depreciating Assets

There is a famous saying “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”. You want to grow rich….Make sure you do not have too many depreciating assets. What are these depreciating assets? Any asset which loses value in a hurry is a depreciating asset. Think smart phone…laptop…car….tablet… But you simply love these things. You can’t live without them. What is life without a smart phone? Well a man in the US has even married his smart phone. You need to understand that as each day passes, your smart phone, laptop and car loses its value. You need a smart phone…but you have 3 brand new smart phones. Isn’t this a waste of your hard earned money? Want to make sure your hard earned money is spent wisely? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Smartphone or a worthless piece of plastic

You have just blown up a whopping INR 60,000, buying a brand new smart phone. You love the feel and touch of your smart phone. The camera….the video recorder…well you can even watch movies in HD. Feels like it’s worth every rupee you have spent. However this piece of news would shock you. Most money draining smart phones lose about 60-65% of their value, within the first month. Just a month after its purchase, your smart phone is worth only about INR 35,000. Shocking isn’t it…

This simple example will bring more clarity on the true value of a smart phone. Ashwin, 28 years of age, works in a call center in Bengaluru. He works in the night shift of an International call center and earns INR 30,000 a month. Ashwin loves smart phones and buys the latest smart phone around. He simply swipes his credit card and makes the purchase. Ashwin has bought 3 smart phones from reputed Companies costing INR 30,000, INR 40,000 and INR 50,000 in the past 6 months, just by swiping his credit card. Ashwin’s credit card charges him 24% interest a year on the outstanding balance. Ashwin used to get by, simply paying the minimum balance on the credit card. Ashwin splurges money on fine clothes and parties and soon fell behind in his credit card payments. Soon, Ashwin could not afford to pay even the minimum balance on his credit card. Ashwin was in serious debt and fell into the loan trap.

What was Ashwin’s mistake? Ashwin had spent more than a lakh, purchasing 3 smart phones in just 6 months. Within a month of purchase each of his smart phones had lost about 60% of their value. Ashwin’s mistake….buying too many depreciating assets. Ashwin had spent more than a lakh on smart phones, which were now worthless pieces of plastic. Worse… Ashwin was paying for these smart phones by swiping his credit card and paying an interest of 24% on the outstanding balance. This costly mistake meant Ashwin was soon in the loan trap.

Your car is fast losing its value

Just bought a brand new car from the showroom? Do you know the value of your car just went down, the moment its tyres hit the road? Cars lose about 20% of their value within a year. Within 4 to 5 years your car has lost more than 50% of its value. Sound difficult to believe? This example should clear your doubts.

Ravindra, who is 31 years of age, works as an executive in a travel agency. Ravindra earns a monthly take home salary of INR 30,000. Ravindra resides just 3 Kilometers from his office. Ravindra commutes to office by bus and sometimes by auto. One day his cousin comes to visit him driving a brand new car. Ravindra is impressed by this car and decides… “I must have my own car”. Ravindra does not really need a car. Ravindra can easily travel by auto to the market or the mall on the weekends, for his family shopping. But Ravindra is adamant. He just wants a new car. Ravindra avails a car loan of INR 5 Lakhs, having a tenure of 3 years, paying an interest of 12% a year. He has to pay an EMI of around INR 17,000 a month. Ravindra soon found car loan EMI’s, eating up most of his salary. Managing expenses (which was very easy prior to availing the car loan), was now a herculean task. Ravindra soon fell behind in his car loan EMI repayments. He was now a prisoner in the loan trap.

What was Ravindra’s mistake? Ravindra purchased a car he did not need. Car is a depreciating asset. Within a year, Ravindra’s car was worth only INR 4 Lakhs. It had lost 20% of its value. Within 4 to 5 years Ravindra’s car would be worth only half its purchase price. This is when Ravindra made his second mistake. Ravindra bought this car availing a car loan. If Ravindra was buying a car using his savings, he would most probably not have made the purchase. However the easy availability of a car loan meant Ravindra bought the car, but soon fell in the loan trap.

What should Ravindra have done?

Ravindra should have invested his money wisely in a good financial instrument. His money would have grown over the years and Ravindra would have been on the path to wealth. Buying a car which he did not need and would soon depreciate, was a wrong decision. Paying interest by availing a loan for something he did not require, was worse. Investing is a sacrifice. You set aside money now, for a better future.

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