Consumption asset

Not everything a household owns builds wealth. Some purchases are made purely to use, not to earn a return. A car is the workbook's own example: it gets the family around, but it does not pay rent, does not pay interest, and loses value every year.

This is a consumption asset. It sits on the other side of the line from physical assets bought for their growth or income, such as real estate or gold. An adviser's job is to help a client tell the two apart, because a client who treats a car purchase as an 'investment' is fooling themselves about their own financial position.

The workbook places consumption assets inside its wider discussion of physical assets, which include real estate, gold and other precious metals. Physical assets are usually bought for appreciation, and some, like real estate, also produce income. A consumption asset does neither: once bought, it does not create further income, and its value typically depreciates — a car needs fuel and maintenance and is worth less every year it is used.

The distinction matters most when a loan funds the purchase. A loan taken to buy an appreciating asset adds to the household's long-term wealth. A loan taken to buy a consumption asset adds a liability with nothing on the other side building wealth back — the household pays interest on something that is only getting cheaper.

Vinod, the workbook's own example client, buys a Rs 10 lakh car on a 5-year loan at 9% interest. Three years later, the car is worth about Rs 5.5 lakh in the resale market — it has been a consumption asset the whole time, generating no income and losing roughly Rs 1.5 lakh in value each year.

Compare this to Vinod instead buying a Rs 10 lakh government bond. The bond would still be worth close to Rs 10 lakh, or more, and would have paid him interest along the way. The bond is an investment asset; the car, however necessary, is a consumption asset — and financing it with debt only adds a liability without adding wealth.

Chapter 1, section 1.4, 'Concept of asset, liabilities and net worth', warns the adviser 'not to confuse consumption assets like car with physical investments'. Expect a question that gives a list of purchases and asks which is a consumption asset versus an investment or physical asset — the marker is whether it generates income or grows in value.

• A car can have a long life, same as some physical investment assets — lasting a long time does not make something an investment. The test is whether it generates further income or appreciates.
• Financing a consumption asset with a loan is the riskiest version: interest is paid on something whose value is falling, not rising.
• Not every physical asset used by the household is a consumption asset — real estate the family lives in and that also appreciates sits in a different category from a car.