If you are having trouble convincing yourself or someone else that your next big purchase is really worth it, here’s a strategy to add to your arsenal – depreciation.
Sticker prices aren’t the only costs we need to consider when making a purchase. Depreciation rates (not just business lingo anymore) can make the most expensive purchases look cheap and should be a driving force in your next big buy. It doesn’t matter if you’re buying a car or DVD, understanding depreciation can save you money while getting more.
When Depreciation Works for You
Depreciation is the opposite of appreciation. An appreciating asset can be hard to find, but is when the value of what you own increases over time. Houses before the housing bubble burst appreciated every year and made the only real cost the interest you paid and the opportunities you gave up. Depreciation is never an investment, but does decrease the real cost of an item from what you see on your receipt.
- Fast Depreciation – Lots of new items like cars and top of the line electronics often lose half their value in the first year or two you own them. If you try to resell a new car or TV a couple of years down the road for half the original cost then you effectively paid the other half for your two years of use.
- Slow Depreciation – Used items have already seen their fast depreciation days pass by and start to depreciate more slowly. A few years with a used item may only see a 10% drop in value meaning if you resell it then you pay only 10% of the sticker price for a few years of use.
It’s Cheaper Than You Think
If an item that you are looking to buy first seems expensive (or not), consider how it depreciates. Don’t worry, it’s not as complicated as it sounds. Here are some examples.
- Cars – We all hear that cars lose thousands of dollars when you drive them off the lot. The Motley Fool suggests that new cars lose 20% or more of their value the first year followed by 15% in year 2, 13% in year 3, and 12% in year 4. Since a newer car depreciates faster than a used car, you will end up paying more per year to drive a new car than a used car of the same price. More importantly, if your loan only pays down principal slower than the car depreciates then you won’t be able to sell your car for enough money to cover the loan. Avoid this by putting down at least 30-50% of the car value as a down payment.
- iPhone – Although you may be a cheapskate, don’t think that holding off on an iPhone upgrade is a good deal. Most iPhones sell for $200 upfront plus a service plan. Since the service plan is used to subsidize the phone, its value is much more than $200 and after two years of depreciation the iPhone is still worth around $200 (just check out eBay for the two year old iPhone 3G). What this means for you is that if you don’t upgrade, you are subsidizing a phone for no reason. Instead, you should sell the old one and upgrade to a better phone for “free”.
- TiVo – Most people complain that buying a TiVo is too expensive especially when you consider the monthly fees just to get access to the TV guide. Worse yet, a lifetime TiVo plan costs $400. Of course, that’s unless you consider depreciation. Some quick research on eBay reveals that while the box may depreciate as fast as any other electronic, the lifetime service depreciates slowly. Even after three years of owning a TiVo, the lifetime service may only depreciate by $100 making the monthly cost a more realistic $3/month (and much cheaper than cable). Take it a step further by buying a used TiVo with lifetime service and when considering the resell value, the service is practically free.
- Books & DVDs – With sites like Half.com, eBay, and Amazon, it is very easy for anyone to sell their old books and movies. Better yet, if you don’t want to wait for all the DVDs on that boxed set television series to come in on Netflix, consider buying the whole thing on Half.com. After a few days of non-stop 24 or Lost, you can sell them back for approximately the same price you bought them minus some fees. This slow depreciation makes watching the used DVDs almost free.
Considering how your next purchase may depreciate can dramatically change how you perceive its value. Taking advantage of the ease of reselling online through eBay, Amazon, or Craigslist makes reselling your used purchases more practical than ever.
This post is featured in the Festival of Frugality at SimplyForties
