After a philosophical conversation last night with a good friend about my net worth “balance sheet” of assets and liabilities, I thought it was timely to delve a little bit deeper into how I construct my net worth. Importantly, today’s post is going to go through my personal views on when is an asset not an asset?
So what was the philosophical discussion about? To be honest, it was about a lot of things, We spoke a lot about my investment strategy, our different risk profiles and asset allocation decisions. But first things first, I was amazed that one of my mates actually continues to read this blog! *insert big smile on my face*
What did he find wrong with my balance sheet?
One thing that he raised, which got a lot of airplay in our discussion was when I sold my car earlier this year and because non-deductible debt-free. His issue was, selling an asset and reducing liabilities is great, but the car wasn’t listed as an asset on my balance sheet and therefore there was no equal and opposite move on my assets!
A car isn’t an asset… Actually it is, but it isn’t
Thankfully, I had a simple answer to his issue. I don’t view a car as an asset. In particular, I don’t see it as a wealth asset.
I’m a car nut, so I’m usually the first person to say that a car CAN be an asset (usually limited to vintage/classic cars or uber-rare cars), but I see a daily-driver as a depreciating asset, hence it’s not a wealth asset.
Why is a car often a depreciating asset? Simple – most cars depreciate in value due to age and condition. So my view is, if it isn’t going to make me money, it shouldn’t be listed as an asset as a part of my net worth balance sheet. Instead, all of the assets on my balance sheet are wealth assets that I feel will provide me income or capital growth over the long term.
In fact, certain cars can create a drag on wealth, beyond simply their depreciation, such as rego and other on-road costs.
Am I cheating?
When I sold a depreciating asset and paid down a liability, I don’t feel that I cheated, simply that I reduced a liability by adding more money into my “wealth” system.
Will my net worth tracking change?
Not at this stage, I’m still happy with the way I produce the tracking. Whilst I’m not an accountant, there is some method to my madness.
Anything that I don’t feel is adding to my overall wealth (or holding my wealth back) is not included in my tracking.
I’m more than happy to continue to receive feedback on my posts and procedures and will update where needed.
Image courtesy of www.freedigitalphotos.net.
Firstly I still read your blog so I guess that makes 2. While we could debate the point for me the key is consistency. As long as you keep tracking the same way, i.e if you buy a car tomorrow on credit you increase liabilities but keep assets as they are, then I think you are on course.
Project Ikonzon 17/07/2014
Awesome! I have 2 regular followers!
That’s absolutely what I’ll do when I buy the new Ikonz-mobile. The car WON’T be listed as an asset, but if I do take on any debt, as that debt affects my wealth, it will be listed as a liability.
When are you going to start tracking your net-worth Bobby? How’s your spare change challenge going?
EL @ Moneywatch101on 17/07/2014
Some folks add their cars as assets and others do not. I agree that a car takes money out of your pocket every month, maintenance and such, but at the point you sell it then it becomes an asset. The same can be said for your primary owned residence, its a drain on cash flow and does not bring in money, unless you have renters.
Project Ikonzon 18/07/2014
Completely agree, especially on the primary residence call.
Keep your eyes open in coming years for major movements in my assets as I reclassify them from being wealth assets, to lifestyle assets.
Ryan @ Impersonal Financeon 18/07/2014
I’ve always considered an asset something that, if I had to, I could sell. A car may be an asset that depreciates daily, but if someone is willing to buy it, it constitutes an asset in my mind. Of course, there are purchases that we all make that we expect no return on other than our personal enjoyment, And we’re mates! I read your blog brother!
Ryan @ Impersonal Finance recently posted…to get ahead, get started
Project Ikonzon 18/07/2014
Yay! 3 regular readers!
I think the point about tracking assets and liabilities is, track it how you see fit, but keep it consistent.
You’re right Ryan, a car is still an asset, it simply depreciates. I guess I should label my balance sheet as a “wealth” balance sheet.
Kay @ Green Money Streamon 29/07/2014
I think whatever way feels right to you is fine, as long as you are consistent. I do the same as Ryan above – I consider my assets to include any material items that I can sell. The value is an honest estimate of what I could sell the item for. So a car is a depreciating asset, but it has definite value at any point in time. I don’t have car loans, so I don’t show a corresponding liability for the car.
Kay @ Green Money Stream recently posted…June Dividend and Side Income Update
Project Ikonzon 30/07/2014
You’re right Kay, consistency is critical.
Do you revalue your car as a part of your net worth tracking?
Great point there and something that I am sure that a lot of people make the mistake with..
Keep up the great work Ikonz
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While I love the idea of an asset being “Something that puts money into your pocket” I still add my car value into my net worth. Simply because if I had a nicer/better/newer car I would be adding it without issue. Or even if I had a car loan, I would still add the car value. So why not add it when it’s just a small measly amount?
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