Monday, April 16, 2007

They Are Not Assets

A recent post of mine discussed individuals in small towns purchasing expensive cars and how ruinous to personal finance that this can be. A close relative of mine is an appraiser and she says that when she visits the houses of people seeking to refinance (take out equity) often she spies a big-screen TV in the living room. I am certain many people view these items as "assets", as well.

In some sense cars are assets. You need a car to get to your job, unless you can walk or take public transportation, or even a cab (NYC). There is a line beyond motor transportation, however, where the portion of the car that does more than just function becomes a personal selection as it veers towards luxury. For instance, you can buy a decent used car (or crappy new car) for about $10,000. The average price on a new car, depending on how you define it, is probably about $25,000 or so. Thus that $15,000 gap is the "luxury gap" that people decide on but don't really need for the base purpose.

Back to big screen TV's... I was talking with my friend Elton about buying a big screen TV for a family member as a gift. I have seen them at Radio Shack and other places as low as $600-$700 and this is near my personal price point. Since I know that he is good at researching this type of thing, he sent me this link to an article about a flat screen TV Olevia 537H which is a 37" model. Currently these TV's are retailing for about $750 on the web.

If you read the article describing the technical features of the TV (it is from PC World) you can see what caught my eye:

"If you're a thrifty TV shopper, Olevia's 537H LCD HDTV deserves consideration. It's put together well, carries a low price ($1499 as of September 8, 2006), and offers a pleasant viewing experience."

Let's do the math here... since September 2006 (about 7 months ago) the TV has DROPPED IN PRICE BY 50%. Thus if you consider your TV an asset (and many people do, since you have to have at least some type of TV in most circumstances, especially if you have kids), that asset has plummeted 50% in value in only seven months! That type of return is absolutely horrible, especially if you financed the original price (put it on a credit card with a balance) and you are paying (non-deductible) interest on the original price, to boot. To give a bit of credit, if you were using home equity to buy this TV, then at least you aren't paying interest on the purchase, but you are paying interest on the portion of the equity that you took out of your home to purchase the television with.

Unless it is fine art or some sort of recognized collectible (way beyond the bounds of this post), all of your "assets" other than your home or financial instruments is depreciating so rapidly in value that they barely qualify as assets. There is some point in having a car or TV, but beyond the basics it is a luxury and the amount spent beyond this basic amount should be recognized as such.

1 comment:

Annie said...

Cars as "assets"?
As soon as you drive off the lot after signing on the dotted line, the car (that you paid retail for) is only worth the wholesale price, which could range from 5-15% less than the original, retail value of the car.
The standard rate of depreciation of cars can be around 15-20% of the car's value the prior year which means a 1 year old car will be worth around 80-85% of the original cost, a 4 year old car will be worth around 80-85% of the 3rd year value, etc. People are nuts if they view this as an “asset”.