Most of us are throwing away hundreds, if not thousands, of dollars every day by using our money to purchase depreciating assets. Now, people will tell you that they aren’t wasting any money because they don’t have any money to waste, but that’s just not true. We waste money everyday in two ways: buying things that we think we need and paying full price for items that we could easily let someone else take the depreciation hit on.
A depreciating what?
There are two types of assets that people buy: appreciating and depreciating. Appreciating assets are things that increase in value over time. In most instances real estate, fine jewelry, and investments are things that gain value the longer you hold them. Depreciating assets on the other hand are things that you buy that lose value over time. For example, most cars, most clothes, and food are things that lose value the longer you hold them. Regardless of how well you take care of an item there are certain items that will not retain the full value. Would you buy an iPhone from someone off of Craigslist.org for $400 or would you rather buy an iPhone from a retailer for $400? Once certain items are owned by someone else the value is not the same as a new same item. Oftentimes, buying an item that’s anywhere from a few months old to a year or two old will help you save money by letting someone else lose money on the depreciation.
How are we doing that?
If you’ve ever bought a car you’ve purchased a depreciating asset. When you purchase food, clothes, computers, cell phones, etc. you are purchasing things that are going to lose value the longer you have them. Now, before you start telling me how much you need these items and how these items help you live a well-rounded life, let me clarify my statement.
Of course we need, some of, these things, but we don’t have to pay full price for them. Let’s use a cell phone as an example. Most people go out and buy a new phone as soon as the tech companies tell us our current phone is obsolete. Let’s say that new phone costs $200 with a two year contract and you’re replacing the phone every two years. That means this person will spend about $4,700 on cell phone equipment from 18 years old to 65 years old. That number does not include cell phone service charges.
The problem isn’t even the cost of the phone. The problem is that once you buy the phone it’s used and it can’t be sold for full price again. It’s very similar to a car. Some purchases hold their value better than others, but the bottom line is that once you buy something new it automatically depreciates in value and what you spent $200 for is not with $200 any more.
Small changes make a big difference
Instead, why not purchase a used phone/car/etc. and let someone else pay for the depreciation? You should definitely buy the things that you need to keep your life running smoothly, but you don’t have to waste money on the depreciation.
Once you start realizing that there are ways to get what you want and still make choices that help you build wealth it’s easy to make different decisions.
Shay Olivarria is the most dynamic financial education speaker working today and the author of three books on personal finance. Visit her at www.BiggerThanYourBlock.com.
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