Take on debt to buy assets, not toysBy Caitlin in Debt
It’s becoming an ever-increasing issue that we as a nation are consuming in large amounts. Often times we’re buying items that are not only unnecessary, but are also causing us to go further and further into debt. In terms of purchasing decisions, there are arguably only two categories: assets and toys. Buying assets increases our net worth and passive income, while buying toys does the opposite.
It helps here to define an asset:
An asset is anything tangible or intangible that is capable of being owned or controlled to produce value, and that is held to have positive economic value. In other words, an asset is anything that will put money in your pocket.
Examples can include anything from stocks and bonds, to real estate, businesses, and commodities such as oil and gold.
So what’s a toy then?
A toy is something that depreciates in value. This means that the moment you make the purchase, it is already losing its value and won’t generate you any more income. Everything from electronics, to cars, furniture and clothes, are all toys and should be treated as such.
So what does this mean for me exactly?
Ok, so we’ve figured out what can be considered an asset and what can’t, but how does that apply to you? Well, the problem comes in when we make purchasing decisions every day. We’re spending money that we don’t need to, and in a lot of cases we’re spending money we don’t even have by going into debt in order to make the purchase.
Adding in the depreciating factor of the majority of purchases that we make (being toys), we can see how this is such a huge issue. We’re not only spending the majority of our hard-earned money on items that depreciate in value, in some cases extremely rapidly (such as technology and cars), but we’re also going into debt in the process and paying significant amounts in interest every year.
Depreciating value of a toy + interest paid on debt to purchase = Unhappy consumer
There are cases however where we simply can’t avoid this equation. Whether we’re needing a new computer for work, we have to purchase a car in order to commute, or we have to buy items for a newly purchased house, sometimes it’s just a decision that needs to be made against us.
The key here is to minimize the unnecessary spending. The more you spend on items such as a new iPhone or that flat screen T.V., the worse you’re making your situation financially. Smart spending is crucial, and it’s important to remember that every dollar spent on an unnecessary purchase, is a dollar that can’t be invested and made to net you income down the line.
A closer look at assets will show us just how significant these decisions are. If your goal is wealth building (like most of us), then you have to realize how dramatic an investment in an asset will be to your net worth.
Say you have $5000 that you were going to spend on a new T.V., but you decide to invest in an asset instead.
At a growth rate of 10% per annum, in just 10 years that asset will have grown to $13,000
At a growth rate of 20% per annum, in just 10 years that asset will have grown to $30,000
At a growth rate of 30% per annum, in just 10 years that asset will have grown to $70,000
With these examples you can really see how drastic these purchases are, and how important it is to be cautious when it comes to buying unnecessary toys over assets.
At the end of the day, it comes down to necessities and your financial goals. Smart borrowing will mean that while you may go into debt in the process, you’re doing it for the right reasons and are increasing your net worth at the same time.
We all need to buy toys at some point, whether it’s out of pure necessity, such as a new car or clothes, or it’s just simply for a better quality of life (which is important too!). The key is to remember that if your goals are for financial freedom, and you don’t mind passing up that instant gratification for a more secure and care-free financial future, then purchasing assets over toys is definitely the way to go. Just remember to always get in touch with an expert before making a significant asset purchase to ensure your money is well spent.