Today I want to go over the difference between assets and liabilities, appreciating assets vs depreciating assets and the importance of using your finances to purchase assets now, to help you afford liabilities in the future. We all spend our finances in one way or another, I’m not concerned about your morning coffees, weekly date nights or the occasional weekend getaway, sometimes, these things as just a part of life. What I do want to confront is big-ticket items we could consider as liabilities. A liability is defined as the state of being legally responsible for something that has outgoings over time. This can include things like mortgages, cars loans, credit cards, personal finance debt, basically anything that is constantly costing you money. Majority of these liabilities are a consequence of buying assets, however, by purchasing appreciating assets, we can actually make our money work for us, rather than us working for our money. An asset is defined as a useful or valuable thing, examples are bonds, land, property, cars, short term investments, basically anything that holds its wealth. So, you’re fresh out into the big bad world, found yourself a half-decent paying job and now have some money to spend, I want to walk you through how buying either a nice car which is a depreciating asset or an investment property which is an appreciating asset can significantly change your financial position in the next 5 to 10 years. First off, let’s go over the nice car, let’s say you have saved up $25,000 and its time to reward yourself, you’ve worked so hard and you deserve to enjoy some of the benefits. The brand-new model of your favourite car has just been released for $45,000 and you head over to the car dealership to buy one, you put your $25,000 down as a deposit and you borrow the remaining $20,000. Congrats! You get instant-post, you take your friends for a drive, you look and feel great, you wash it every week and it becomes your baby for the next 6 months. Until, after all the excitement has died down, you’ve nicked the rims once or twice and still trying to get the coffee stain from last Monday off the front seat, it’s now become just another car, getting you from A to B. In the mean-time, it’s also cost you an absolute fortune. A good rule of thumb to assume that a new car will lose approximately 20 per cent of its value in the first year and 15 per cent each year after that until, after 10 years, it's worth around 10 per cent of what it originally cost. So for those 6 months of feel-goods, after 5 years, your not so new car is now worth around $19,000, and because you borrowed $20,000 on let’s say an average interest rate of 8.5% over 5 years, its also cost you $4,600 in interest repayments. Costing you a total of ($45,000-$19,000) + $4,600 = $30,600 over 5 years or more than the total original value of the car ($45,000 - $4,500) = $40,500 + $4,600 = $45,100 over 10 years. Let’s compare this to investing the same $25,000 deposit into an investment property over the same period. If you’re a first homeowner, you can utilize the new Morrison Governments first homeowner scheme in 2020 to use the $25,000 as a 5% deposit on a $500,000 house, if you want more information about this I have talked about it more in my previous videos. For good measure, let’s say you buy a property for $460,000 with stamp duty of around $24,000 and additional bank and legal fees of $3,000, in total it's going to cost you $27,000 upfront for a $460,000 asset. There are two main financial benefits of buying an investment property, one is obviously the rental returns from having tenants rent it out, the second is something called capital growth, which is just the growth in value on the property. When you have a high rental yield, which is a high amount of income from rent compared to the total value of the property, hopefully, you can positively gear your investment property. Meaning you're earning more than your spending, generating a positive cashflow of passive income, so if your expenses where $1,800 PM and your income from rent is $1,920, you would be making $120 of passive income per month just for owning the property. The second financial benefit is capital growth, meaning your property overtime increases in value. On average in Australia over the past 25 years, there has been an annual growth rate of 6.8% for houses and 5.9% for units PA. So let’s say you bought your house for $460,000 in a nice area that has a good history of the average 6.8% PA growth, in your first year, the value of your property should increase to $491,000. Meaning, not including initial setup & selling costs, you have made $31,000 in just one year. The best part of this, is you have leveraged your $25,000 deposit to borrow someone else money, turning it into $56,000. That’s a 125% return in just one year of average growth. However, considering the initial setup costs of $27,000 plus the selling costs of around $15,000 - $20,000 depending on the capital gains tax, this growth gets eaten up quite quickly, your going to have to sit on the property for the long haul to see a good return. After 5 years of average growth, your property would be worth $640,000, which is a profit of $180,000 and 10 years it should be worth $888,000 giving you a profit of $428,000. After 10 years, on rough numbers, we can take that $428,000, minus initial buying costs $27,000, minus selling costs of $40,000 which includes capital gains tax and agent selling fees, you’ve turned $25,000 into $360,000 over 10 years. This is all presuming you’ve had neutral cash-flow from renting out your property over the entire 10-year period, and purely based on the average capital growth. So I’ll leave it completely up to you, you can look good now in your brand new car which is going to cost you $45,100 over 10 years, or you can help your future self out financial and have $428,000 of equity in assets which will help you afford liabilities when you most need them. As always, seek your own professional financial advice for your current situation. Until next time, happy house hunting.

DISCLAIMER: No Financial, Property Buying, Legal, Taxation or Accounting Advice The Listener, Reader or Viewer acknowledges and agrees that: Any information provided by me is provided as general information and for general information purposes only; I have not taken the Listener, Reader or Viewers personal and financial circumstances into account when providing information; I must not and have not provided legal, financial, property buying, accounting or taxation advice to the Listener, Reader or Viewer; The information provided must be verified by the Listener, Reader or Viewer prior to the Listener, Reader or Viewer acting or relying on the information by an independent professional advisor including a legal, financial, taxation, accounting and property buying; The information may not be suitable or applicable to the Listener, Reader or Viewer's individual circumstances; I do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations Act 2001 (Cth) and we are not authorised to provide financial services to the Listener, Reader or Viewer, and we have not provided financial services to the Listener, Reader or Viewer.