My little sister worked for a law firm that did repossessions when she was in high school. She literally called to repossess people’s cars and boats on Christmas Eve (“What? They shouldn’t have *bought* a bmw if they couldn’t afford it.”).
One of the big things that she learned from that job is to never borrow to invest in a depreciating asset.
When you buy a depreciating asset, you can end up owing more for that asset than what it’s worth. You can have that car taken away and *still owe money on it*. So you’re left with no car and a debt. You would have been better off without the temporary BMW in the first place.
If you’re going to invest, whether or not you borrow, then invest in appreciating assets. Things that will be worth more in the future.
Why?
Because when you invest in appreciating assets, that means you get to consume more rather than less in the future. You get to consume more in the future with less effort. Because your investment is making money for you and providing stability.
Get rid of high interest debt. That’s a huge drain and is just throwing away money that could instead be keeping you safe or providing for guilt-free career changes or trips or what ever it is you’d rather have than debt.
Invest in yourself. It makes sense to take a reasonable debt load for education that will pay off monetarily in terms of income down the line. And it is true that cars depreciate right off, but when you’re starting out if you’re in a place with lousy public transportation, it can still make sense to take out a car loan because that appreciating asset is *you*. (That doesn’t, of course, mean you should be buying a BMW when all you actually need is safe and reliable transportation.)
Invest in reducing risk. Have an emergency fund in safe assets like a CD ladder or a saving account. Buy amounts of insurance that are right for your situation. That way an emergency won’t put you back to zero or less.
Invest in your monetary future. Put money away for retirement in tax-advantaged accounts. Put extra money in the market or in bonds as a FU fund in case times goes bad or you get an amazing opportunity. Your future self will thank you.
And after you’ve invested, then there is nothing wrong with consuming. But don’t borrow to consume a depreciating asset. Let the profits from your appreciating assets fund your extra consumption. Because then you won’t have to write blog posts about how you can’t make ends meet on necessities because you have all this high interest debt that you’re not paying off (even with your high income) because of all the stuff you buy and trips you take. You’ll be able to buy the stuff and take the trips without complaint after the debt is gone and you’ve taken care of your future self.
Have you ever borrowed to invest in a depreciating asset? Do you invest in appreciating assets? How do you manage risk?
Grumpy Rumblings (of the formerly untenured) 
March 14, 2016 at 4:02 am
Where is the line in the sand where you’re no longer investing in your image, which you need to be successful at your job, but actually just a frivolous expense? For instance, you and I might not value being tan, but my brother in law who lives in Italy was ordered to go to the tanning salon by his boss so that he “wouldn’t look sick” in front of his clients. I could imagine that a bmw might function in a similar way.
March 14, 2016 at 7:38 am
If it is truly needed for work, work should be paying for it. Either directly or via tax breaks. I would hope he doesn’t need to borrow to get a spray tan in any case.
March 14, 2016 at 4:33 am
Yep, we’re likely going to borrow to reno the house. Which wouldn’t always be investing in a depreciating asset, but might be in our case. If we stay in the house, it’s best to think of the reno as consumption. But if we rent out later, it might prove to be a sound investment, so it’s difficult to classify.
I also think that, cynically, education is also a depreciating asset in a couple of ways- one is that the minute you are born you start dying… many degrees that are defensible at age 18 aren’t at age 40. The other is that the comparative boost from degrees is generally declining, so the amount of high interest debt available in no way reflects the investment value of a degree. Of course, lots of people make their best guesses as to what will be an appreciating asset and don’t get it right. Or don’t pick an investment happens to be up when they want or need increased consumption.
March 14, 2016 at 7:52 am
We’re waiting to pay cash for unnecessary renovations (see: will we ever redo the kitchen). Re:education that is one reason you shouldn’t get a Ph.D. unless someone else is paying.
March 14, 2016 at 7:37 pm
We borrowed a heck of a lot to invest in a depreciating asset, but we managed to hold on through the housing crisis, so it’s appreciating again. But there are all sorts of luck and timing issues that make mortgages a lot riskier than people think. We know a lot of people who lost their homes, and very few of them took the “as soon as you realize you’re not going to be able to make it, stop paying completely” advice that at least minimizes the loss.
March 14, 2016 at 4:59 am
We now have a 0% car loan, which in my mind isn’t borrowing. We’re not paying any more for the car than we would have if we’d paid cash. We once had a car loan with some interest and that worked out fine, because we made sure it was a short term and a low rate, and we needed a functional car. Since we drive cars for well over 100,000 miles, I think we got our money’s worth in the end.
We just try to avoid debt, period, if we can, aside from our mortgage and home equity loan. We’ve owned our house for 15 years and it’s worth more than we paid for it – and about twice as much as we owe on it – so it’s an appreciating asset. Overall I agree with what you say.
March 14, 2016 at 8:42 am
Needing a functional car goes under “investing in yourself.” :)
March 14, 2016 at 11:05 am
We also have a 0% car loan right now for reasons amounting to perverse incentives between buyers, sellers, and dealer financing.
March 14, 2016 at 6:03 am
This is why we drive cars that aren’t very attractive or new at this point in our lives. It feels like setting money on fire to me.
I learned my lesson on this one. My first new car was a Mitsubishi Galant, and I borrowed near 25K for it and put zero down. I was 20. That car payment ruled my life for four or five years until I was finally able to pay it off. In hindsight, I’m pretty lucky it didn’t ruin me financially.
March 14, 2016 at 9:41 am
Wow, yeah.
March 14, 2016 at 7:18 am
My uncle was the first person to point out to me that a house is a consumer good, not an asset, really. But it can be an appreciating asset too if you’re lucky, and depending where you plan to live after you sell it.
So what appreciating assets are there to invest in anyway? I guess the stock market. Education, as some have suggested. Fine art :)?
March 14, 2016 at 7:58 am
You can buy depreciating assets as consumption, just don’t borrow to pay for them. Art seems more risky than other choices.
And obviously interest rate is important– it is usually worth carrying a low interest mortgage while investing in retirement savings.
March 14, 2016 at 9:31 am
Yes, I did borrow for the first two cars I bought after ungrad. Both were new and I financed them. Based on past experience with used cars when I was in high school and during the early college years, I didn’t have a lot of trust in used cars. The new cars I bought weren’t status symbol cars, though. The first was a Hyundai Excel and the next one was a Saturn sedan. Both were manual transmission, too. I kept the Hyundai for eight years (I paid it off in four), and the Saturn for nearly five years.
My next car was a new Saturn station wagon, as well, but I bought it with 0% financing and adding no additional money down other than the trade-in of my (not quite paid off) Saturn. I kept that car for 11 years, and then bought my current car (a 2009 Prius) with cash in 2012. By that time I had some better confidence in being able to buy a decent used car instead of a new one.
Other than those few cars I borrowed a small amount for my undergrad degree (paid off by the time I started graduate school several years later), and had a short-term student loan for my first semester of grad school, which was paid off in a year.
I’ve been saving the maximum (plus more) for retirement since my early 30s, but these days it really doesn’t seem like an “appreciating asset.”
March 14, 2016 at 9:39 am
Well, at least you’re not borrowing on credit cards to play the stock market!
March 14, 2016 at 10:06 am
These are probably the same people who criticize poor and low-income individuals for playing the lottery.
March 14, 2016 at 9:52 am
Sidenote: This year’s pi day just isn’t as exciting as last year’s. I guess maybe if you round?
March 14, 2016 at 10:36 am
Depreciating: I’ve got a car loan right now, so yeah. And we not only financed, but *leased* the preceding car. Oy. People, don’t lease cars unless you are a corporation and can write it off to business expense. So we have been all kinds of stupid AND YET so much better off than many. (I am 50, this is my fourth car – one was a gift, one was the leased one, one was paid for in cash, and the current one will be paid off by the end of this year unless my MIL’s situation explodes again, which is unfortunately not unlikely.) And also, having cars is kind of not optional at this point if we are going to have the jobs we need. So the car thing is probably a wash.
Appreciating: I have a pretty fat 401(k). And we are buying a piece of land, but whether that “appreciates” during our lifetime or whether it is just a square in the financial-security quilt will not be known until we a) die b) sell the land.
We had pie all weekend. Yay Pi Day!
March 14, 2016 at 10:37 am
We had cherry pie!
March 14, 2016 at 11:18 am
We like to buy our cars outright, but I would borrow if I couldn’t buy a reliable car outright. As you say, I see that as investing in me (i.e., my car doesn’t strand me someplace potentially dangerous). I also much, much, MUCH prefer the experience of buying a new car vs. a used one, so there is a decent chance I’d borrow a bit to be able to buy a new car instead of a used one.
I don’t prioritize the status conveyed by the car- but I am in a career where that is acceptable. There are careers (usually very customer facing, like real estate, interior design) where a solid case can be made for leasing, because there is a business reason to always be driving a newish car. I’ve never really evaluated the case, because it doesn’t apply to me, but I know some smart people who are pretty adamant that they must keep a car that is 5 years old or less for business reasons.
I’ve also seen people argue that it makes sense to lease electric cars, at least right now, when they are improving so rapidly. I haven’t looked into that argument, either, although I might as our Prius is now 9 years old. We’re likely to keep it for another 5-7 years, but it is getting to the age where if something major needs fixing, we might just replace.
We don’t carry any debt except for our mortgage right now. We just added to that to add on space, but that (1) is likely to pay off in increased value, due to our generally rising real estate market and how much nicer the expanded living room makes our house feel; and (2) has made my life so much better it sort of feels like an investment in my own sanity.
I’ve never really formulated a money philosophy. Perhaps I should try- I’m facing some decisions about retirement savings, etc., right now that I feel a bit lost on. Maybe if I could clearly state my philosophy that would help.
March 14, 2016 at 11:25 am
Matching money to values is a great exercise. We’ve got some old posts on that (from like 5 years ago), but I think we took them from Smart Couples Finish Rich. (The book known for the “latte factor”, which is kind of silly, but good in other ways.) Your Money or Your Life, of course, is also a good one for figuring out what is possible in terms of philosophy (in that it shows that money can buy freedom, as you know!).
March 14, 2016 at 1:35 pm
Oddly enough, both my experiences buying used cars were great. The experience of buying the new Honda, back in 1998, was HORRIBLE. Awful, stressful, to the point of wanting to either scream or cry, patriarchal bullshit knee-deep and manipulative condescending bullshit the rest of the way up.
March 14, 2016 at 7:15 pm
I confess to sending my FIL off to do all new-car-related negotiation. This is our second car ever and at our current rate of one every 10-15 years I feel it is not a skill worth cultivating. (I don’t get on with my in laws at all but at least they have ONE useful skill.)
March 14, 2016 at 7:27 pm
I pretend to be DH over the internet and then send him to do the handshake. There’s plenty of good research showing that the man should do it because he’s less likely to be discriminated against by dealers.
March 15, 2016 at 12:39 pm
Here’s the sad thing: we were both there. :-) They were just as shitty to DH as they were to me!
March 14, 2016 at 6:18 pm
The one great lesson my parents taught me was save so you can always pay cash and always buy used when it comes to cars. I always have. We do have the dreaded BMW, but it’s used and we paid cash. ;) it was cheaper and a better deal than a Honda Accord, plus it has a sweet warranty.
March 14, 2016 at 7:41 pm
Our next car will be a (probably used) cute one. We’re on the fourth four door grey sedan in a row and I want something more fun. But the fun part is pure consumption, not investment at all. And that’s OK. I’ve laddered up from walking, to a free bike, to various used bikes, to mid-range new bike, to an expensive cargo bike, and none of them even approach just the insurance on the car, so i’ve got the cash to put into a fun car. When this last Toyota finally bites the dust.
March 14, 2016 at 8:14 pm
Our most recent car we bought outright and that felt good after two cars before with 0% loans. My husband was always very leery about the loan costs with his more chancy employment income so he’d push for longer terms which drives me crazy. This time around I got no loan at all. Whee!
I’m saving like crazy to try and do the same when we replace the seven-year-old sedan – that will be a challenge as most of our flexible savings is paying for Eldest’s undergraduate degree in the Big City. We have other savings for that but it’s still not cheap to cover tuition and her living expenses.
We also have been investing more of our savings into his retirement funds. I’m putting money into a spousal RRSP in his name and he’s contributing, too. My work pension should be pretty substantial but he has very little through years of chronic underemployment, so this is a priority.
I’m dithering at present between using the next chunk of flexible savings in different ways. I fantasize about renovating our kitchen (ugly eighties cabinets are starting to fall apart, tiles are cracked, laminate countertops are peeling) but I would also like to pay down the mortgage faster. I don’t think I can manage both right now because the kitchen renovation will be a big chunk of change. If I pay down more on the mortgage, I won’t have half of what we need for the renovation in four years which is as long as I think I can baby these kitchen cabinets into staying somewhat intact.
March 15, 2016 at 12:43 pm
fwiw I understand there are deals to be had at Habitat stores for gently-used kitchen fixtures. I myself would prioritize fixing a decrepit kitchen over speeding up mortgage payments … because quality of life is worth investing in, too, and – even in my household, one in which both adults actively resist cooking – the kitchen is simply the most-used room in the house after the bathrooms. :-)
March 16, 2016 at 3:36 pm
I have been lucky I guess. The used cars I bought were all fine.
I think house expenses vary so much by market. In some places, it’s easy to over improve. In others, it makes sense to renovate prior to a sale. This is probably the grey area for me…but I will say, we pay as we go for the most part. It may be a sunk cost, but it least it’s not with interest on top.
I think absolutely all of my “fun” assets (like bikes, canoes, etc) have been bought with cash and usually used. The thought of taking a loan to buy a boat or jet ski is something I just can’t get my head around unless it’s a business.
March 16, 2016 at 3:42 pm
Also, some types of home renovations generally increase value more than they cost, some usually don’t make up for their costs. There’s cost-benefit analysis to do for the person thinking about resale value.
August 12, 2022 at 1:14 am
[…] Spending money can increase or decrease future expenses. Invest in appreciating assets. […]