How to Talk to Your Child About Depreciating Assets

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When most of us think about teaching our kids about money, we tend to underestimate exactly how detailed we should and can get.

We tend to think about it only in terms of saving, budgeting, and getting them a checking account.

Recently, during a car ride, my son and I began talking about contracts, and it led to a discussion on depreciating assets.

You would think that my son would have quickly tuned me out, but he was the one asking the questions.

  He was leading the discussion by being curious about the topic, and it is one I never would have thought to cover!

So don't feel like you can't have these conversations with your children because it seems too top level - it may be exactly what they are looking for.

With that said, here are some talking points from my conversation with my son about depreciating assets.

What are Depreciating Assets

First, let's start with what an asset really is. An asset is something that you own or possess that is considered to have financial value.

A depreciating asset is something that over time will lose its value. For example, a car and a computer are assets that over time go down in value.

Most of the time you hear depreciation talked about from a business perspective, but you have many personal assets that are impacted by this loss in value. You just don't get the perk of being able to deduct it on your taxes.

Why are Depreciating Assets Important to Understand

When you spend too much of your money on assets that go down in value, you will struggle to create a financially secure future.

When you buy more cars, boats, and computers than you do stocks and other investment then you will not accumulate money that grows without you going to work.

These assets that grow are what you need to retire. 

The sooner your kids learn this lesson, the sooner you will save them from blowing all their money on big kid toys and get them investing faster!

For more on how to teach your kids to invest.

How to Explain it to Your Kids

I would recommend you use the example of a car for your conversation.  It is something that most kids have experience with. 

Use these steps for explaining it:

  • When you buy a car you may pay $1,000. Cars are all different, but we are going to use $1,000 to keep things simple.
  • Over time the car will become worth less money. When you use a car, the amount of years left for it to be used decreases. Thus if you sell it, someone else would pay less because they will not have as long to use the car.
  • It is still considered an asset because you can still find someone to buy it. If you want, you can add in a value here for an example. Such as if you sell the car in a year you may only be able to get $800 for it.
  • Eventually, the car will be worth zero dollars as no one can use it and the car becomes old enough no one wants the parts.

Some other things to keep in mind while talking with your child about depreciating assets.

  • Remember to keep it age appropriate. The younger the child the simpler you will want to make the conversation. Yet by the time your child is in high school, you should be able to have this discussion without simplifying anything.
  • Stop frequently to ask if they have any questions. By giving them the opportunity to ask questions they will understand the idea better, plus they may end up asking questions that you never would have thought to cover!
  • Don't forget kids learn by following your example so if you have tons of big kid toys prepare yourself for them asking about the family boat, car, etc. However, don't use this as an excuse to avoid the conversation, let them learn from your examples.

Don't be afraid to tackle bigger topics with your kids, they want the information!