“Instead of thinking about the bike in terms of the benefit I get from riding it, let’s think about it as an asset.”
As I have yet to go about the traditional adult milestone of purchasing a car, my main method of transportation at university remains my bike, which follows me between my house and dorm every academic year.
This past year, I managed to get a flat tire early in the semester, and with no local bike shops, the bike was forced to sit outside and decompose in the elements for several months, followed by another period stored in a garage as I studied abroad.
All told, approximately 9 months passed with little use, and the bike was in rough shape.
But sentimentality aside, it’s a really nice bike.
And so I decided to take it to a local bike store for a proper cleaning, tune-up, and fix-up. It was a little expensive ($100, all told), but I told myself that if I wanted to support local businesses, I had to start putting my money where my mouth is and actually utilize local services.
But part of me still felt bad – I had originally bought the bike used for approximately $350, and spending nearly ⅓ of that on a fix-up seemed a little gratuitous.
As I grappled with this feeling, it occurred to me that there might be a different way to look at the situation. And so I attempted to reframe the problem in economic terms and came up with a model that I not only found more comforting but also think is a better representation of my spending.
Instead of thinking about the bike in terms of the benefit I get from riding it, let’s think about it as an asset. I invested $350 into a piece of equipment that I use and can technically resell at any point. This means that my bike can be considered an asset- a store of value.
Sure, that value may fluctuate over time depending on the specifics of the bike market, and it will also naturally depreciate (the gears will wear down, the technology will become outdated), but in general, it will retain some value.
If I had to resell the bike prior to the fix-up (say on Craigslist or Facebook Marketplace), I would have priced it at $250. It’s a good bike in crap condition, and that would have been a reasonable price.
But after the fix-up, the bike works like a dream. Its value has clearly increased to any reasonable customer, and as such, my estimated sales price for the bike would have increased to $325.
Therefore, I spent $100, and the value of my asset increased by $75. This means that my ‘loss’ was only $25.
Essentially, I spent $25 to improve the experience of riding my bike. The additional $75 was simply moving my money from one form to another – instead of being stored as cash in my bank account, it’s now stored in my bike as an asset.
Obviously, the bike will continue to depreciate, and perhaps in a year or two, I may no longer be able to sell the bike at $325.
But at this moment, my only real loss is the $25 which did not translate into equity value on my bike. And frankly, $25 is absolutely worth the improved riding experience.
This realization got me thinking about other situations where this concept might apply. Where else might we see examples of this? Any time we spend in a way that increases the value of something that we own (otherwise known as an investment).
- Replacing the roof of your house, or adding a wrap-around porch
- Getting your car fixed up
- Restoring an old piece of jewelry
You can even think about investing in yourself (say, by getting a college or vocational degree) in this format. You invest time and money into increasing your own value in the eyes of a potential ‘purchaser’ of your labor. Your investment in your own ability makes you more valuable in their eyes and, therefore, increases the value of the asset that is yourself.
Of course, it’s important to remember that investments come with risks and uncertainties, and that not every investment is equal. Perhaps a $10K investment in your car will only increase its resale value by $900. Conversely, perhaps adding a $15K pool to your home might increase the sale price by $50K.
Often, it can be hard to know in advance because the market fluctuates. That being said, there are certain types of spending that you can predict will retain value better than others.
We talk plenty on this blog about different types of spending and the difference between investment and consumption. Understanding the concept of asset value, and how spending can increase equity, is a tool to help us make smart financial choices. If there’s a point to take away from this article, it’s that sometimes we can find a way to have the best of both worlds, and it can be as easy as riding a bike.
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