No matter how careful we are about spending and saving our money, the truth is that all of us spend some significant portion of our income on a mix of things we need and things we don’t.
Some of those things are consumed, like food and water and gasoline and experiences, for instance – and you’re left with nothing but the memories afterwards. Other things are not – our car, our home, our hobby items, and so on. You continue to hold onto those possessions afterward and can, in theory, sell them.
Those things that you can potentially re-sell fall into two groups as well.
One group has a resale value less than what you paid for it. You paid $50 for something and can only get $5 for it later. That’s called depreciation.
Another group has a resale value that’s more than what you paid for it. You paid $50 for something and can get $60 for it later. That’s called appreciation.
In the end, you spend your money in one of three ways: on things that are consumed, on things that depreciate, and on things that appreciate. It’s all about the eventual money you can get from selling that item – it’s either nothing (because you used it all up), less than what you paid for it, or more than what you paid for it.
I’m going to make a very simple suggestion: The more of your money you spend on things that appreciate, the better your long-term financial health will be.
It doesn’t require a radical shift, either. Simply spend a little less on things that return nothing or things that return less than what they cost, and spend a little more on things that return more than what they cost.
Let’s look at some things that fall into each camp. This is far from an exhaustive list, but it does cover many common things that people spend their money on.
Things That Return Nothing
Food is something that you simply consume. You eat it, it goes away, it doesn’t return any value to you. That doesn’t mean that you don’t need it to survive, but that every dollar you put into food and beverages disappears.
Experiences follow the same trajectory as food. When you pay money to experience something new, you’re left either with nothing or with something that cannot be resold. That’s not to say that there isn’t personal value in memories and experiences – there is – but most of the time, that experience doesn’t translate into money. (There are exceptions, which I’ll touch on below.)
Things That Depreciate
Cars depreciate quite rapidly. It’s not a stretch to say that new cars lose a significant portion of their value the second you drive them off the lot and continue to gradually lose value over time after that. It’s extremely rare to get back what you paid for a car; that generally only happens with an extremely well-maintained older car.
Appliances depreciate significantly with use. Most of the time, people use appliances until they fail and then haul them away to the dump. On rare occasions, people might sell used appliances, but they’re never going to get the full original value for it.
Computers and smartphones are great examples of depreciation. As soon as you buy them, their value starts slowly slipping away, drip by drip, drop by drop. Many people do eventually re-sell their phones and computers, but they get only a small fraction of the original value.
Clothes also depreciate rather rapidly. Sure, you can always get a little value for them via yard sales or consignment shops or even from the tax deduction that comes from donating them, but that value is a tiny fraction of what you originally paid for those items.
Entertainment items, such as DVDs, books, Blurays, video games, and so on all depreciate. You can almost always get at least some return from those items when you sell them, but that return is virtually always significantly lower than what you originally paid for the item.
Things That Appreciate
Homes, for the most part, tend to grow in value over time. The only real question is whether or not the additional costs of home ownership – property taxes, insurance, and so on – outstrip the gains.
Investments almost always appreciate in value. If you can buy something, hold it for a while, and sell it for more than it’s worth, that’s a great choice. Some investments, like bonds and dividend-paying stocks, even pay you money while you hold them.
Smart self-improvement can definitely appreciate in value, but it comes with the caveat that you can’t actually sell it. Instead, it adds more dollars and cents to your life than you paid for it. A great example of this is a college education, which will almost always pay you more in the long run than you ever paid for it.
Collectibles can appreciate, but you have to know what you’re doing, have some capital up front, and have a strong sense of when to buy and when to sell. In the end, the appreciation of collectibles tends to rely on a large set of domain knowledge from the collector – they have to know their stuff.
What About ‘Slow Depreciation’?
Like it or not, everyone is going to buy things that depreciate. That’s just a fact of modern life. Buying things that depreciate is going to have a negative impact on your finances – another fact of modern life.
However, you can choose to buy things that depreciate more slowly than other things. For instance, you can buy a more reliable car instead of a flashier car.
This has two real benefits.
First, the depreciating items go down in value more slowly. If something is reliable and has a known history of reliability – like, say, a Toyota or Honda automobile – it’s going to go down in value much more slowly. That’s because a used version of that item is going to have more value after, say, 10 years of use than a Volkswagen.
Second, the depreciating items do not need to be replaced as often. This goes hand in hand with why the value of some items drop more slowly than the value of other items: It’s because they last. A well-made car with 100,000 miles on it is going to run for a lot longer than a poorly-made car with 100,000 miles on it. That means that you’re going to be able to keep driving that well-made car for many more years and you won’t have to deal with replacing it nearly as often (which is an expensive endeavor).
What Can You Do?
So, what’s the solution to all of this? What can you do to take advantage of these groupings?
First of all, spend a little bit less money on things that depreciate or that return no value at all, and spend a little bit more on things that appreciate. Cut down on your wardrobe and hobby spending a little bit and put some money into retirement or into smart self-improvement. If you’re going to put money into a hobby, invest in items that are going to grow in value if possible.
Second, if you’re going to spend money on things that depreciate, choose things that depreciate slowly if possible. Buy cars that have a history of reliability. Buy household items that offer a long warranty because they’re so well made.
Third, maintain your stuff. Take the time to do proper maintenance on the things that you own. Doing so will extend their lifetime and slow down their depreciation, which effectively means money in your pocket.
The value of spending money on things that do not depreciate came to me from a friend who had turned his Magic: the Gathering hobby into a side business. He had spent a great deal of time studying the market for those cards and figured out some pretty good methods for figuring out which cards will hold their value and appreciate over time and which ones would not, and thus he would trade for and acquire the ones that held value. Over the long haul, his collection has actually appreciated significantly in value because of his choices.
The same phenomenon really is true in all areas of life. If you spend your money on things that build value rather than lose value – or at least on things that lose value more slowly – your finances are going to end up in much better shape over the long run.