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Don’t Pay for Depreciation

{ 40 comments }
car depreciation

You are paying a high price for depreciation if you buy new.

Per dictionary.com, depreciation is the decrease in value to due wear and tear, decay, decline in price, etc.

Well, according to this definition, we can’t avoid depreciation. When we buy something new, the price will start to decline soon after due to wear and tear. Even if we buy used items, we will use those things up until they are broken or worn out. So how can we avoid depreciation?

It is difficult to avoid depreciation completely, so what we can do instead is to avoid the largest part of depreciation by buying used. The easiest example of this is buying a car. For many of us, a vehicle is our most expensive possession or 2nd most if you have a house. We can save a lot of money by avoiding the first few years of depreciation. You can see from the graph above that an average new car loses half of its value to depreciation in the first 3-4 years. The rate of depreciation is different depending on the exact car, but the steepest depreciation drop will always be in the first few years.

Sure, we all know that buying a used car is cheaper than buying a new car. The next leap of logic is to buy other used items as well, right? Buying used works especially well for baby and kid items. This weekend we went to a consignment sale for children’s clothes and items, and picked up a few shirts and shorts for the little dude. I guess we can’t call him baby RB40 anymore since he is more of a toddler. 🙁 Kids outgrow clothes so fast that it doesn’t make sense to buy new. A gently used shirt costs $2-3 and that’s much cheaper than new. A new shirt can cost anywhere from $5 to $25 and he would only wear it for a few months. His grandparents send him some new clothes now and then so he has a good mixture of new and used items.

If you look at the graph above again, you can see that the vehicle depreciation curve really flattens out after 15 years. At this point, you can buy a vehicle, use it for a year or two, and then sell it for almost the same price that you got it for. I once purchased an old Subaru wagon for $500 and then sold it for the same price 2 years later. The same concept applies for almost any item. In my experience, used children toys, camera lens, and musical instruments hold their values very well.

Lately I’ve been a bit more cost conscious and try to check Craigslist before I buy anything new. There are some exceptions of course. I don’t buy used clothing for myself. I think men wear their clothes until they are pretty much destroyed and the men’s used clothing selection is severely limited at the thrift stores. What about you? Do you buy used items?

 

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{ 40 comments… add one }
  • Elaine Colliar April 30, 2012, 4:10 am

    So with you – and its not even about being frugal, its about being smart. Sure in the beginning it was about paying off debt – now its about creating great quality of life on minimal income so that when I can return to work full time all of our financial goals can be accelerated.

    The car is a clunker – but it is safe and does the school runs (in fact I joke that I double its value every time I put fuel in it)

    My furniture is second had – and refinished to give a designer look at flea market costs.

    Our wardrobes are lean but functional – my toddler BTW is dressed in trousers made from one of Grandad’s old pairs and a shirt that is another cut-down. Cost to me 12p for some elastic for the waist.

    Best hint from my old boss – “never own anything that needs money spent on it whilst you sleep” – not a bad hint from a multi-millionaire LOL

    • retirebyforty April 30, 2012, 9:56 am

      Our car is pretty new, but my excuse is that we only share one car and we need the newer safety equipment. 🙂
      Many of our furniture are 2nd hand too. There are so many things for sales on Craigslist so there is no need to buy new.

  • Little House April 30, 2012, 6:52 am

    I think buying used items works well for certain categories – like furniture or cars or even electronics that are in good shape. Baby clothes are great to buy used since kids grow so quickly, but I think I’d agree with the men’s clothes comment; my husband wears things out until they thread-bear.

    • retirebyforty April 30, 2012, 9:58 am

      We have a ton of baby clothes that are in great shapes. I’ll send these to my brother so they can reuse. I knew it, my men’s clothing observation is right. 🙂

  • Kurt @ Money Counselor April 30, 2012, 7:45 am

    I think ‘used’ first for just about anything I need to buy. Not only is it cheaper, it’s easier on the environment–a form of recycling.

    • retirebyforty April 30, 2012, 4:10 pm

      Good point about reuse.

  • Roshawn @ Watson Inc April 30, 2012, 9:36 am

    I definitely understand your feelings regarding car depreciation. That graphic is perfect. Oh, how we love our cars! Overall, we don’t go overboard in either direction. There are definitely some things that I tend to buy used though, such as books (that’s green but perhaps not as green as an ebook).

    • retirebyforty April 30, 2012, 4:12 pm

      I don’t like to purchase books anymore since our library is so good.

  • The Passive Income Earner April 30, 2012, 10:37 am

    I switched to buying used cars – approximately 4 years old after buying new and wasting money 🙁 I also decided that I am not changing cars until the mortgage is paid 🙂

    We use craiglists but more importantly, we shop where the discount is from a price/value point of view. For example, we would buy clothes at an outlet mall with further discount rather then just at the store. Note that when we had kids, we had a lot of hand me down. Now that our kids are tweens, fashion is kicking in.

    Price for value is my mantra and more importantly, my kids are learning it too 🙂

    • retirebyforty April 30, 2012, 4:10 pm

      That’s a great challenge. We should do that too.
      I hear it gets more expensive when the kid hit the teen years. I guess it’s especially true for clothing.
      Price for value is a great mantra!

  • min hus April 30, 2012, 11:04 am

    I haven’t had a lot of success finding used items when I need them. I find it hard to find used clothing; it’s hard enough finding clothing and shoes that fits in stores when you are a 5’11” female. I also bought my first car out of college brand new, which I wouldn’t do again, but I still have that car 12 years later. In fact, people have been wanting to buy it off me lately, because it’s in good shape with low miles, but I say no way! It’s got another 12 years left in her I’m sure.

    • retirebyforty April 30, 2012, 4:08 pm

      Sometime you need to be patient about buying, but that’s good right? It will give you a chance to think about the purchase more and a lot of time you’ll find that you don’t really want to spend the money. 🙂
      I see your point about used clothing.

  • Dollar D @ The Dollar Disciple April 30, 2012, 11:24 am

    I’ll try to get something used before I ever buy it new. With the internet and Craigslist, it’s easier than ever to find good, used items and keep them out of the landfill for as long as possible.

    • retirebyforty April 30, 2012, 4:07 pm

      This is why I think the storage area business is a bad idea. Isn’t it better to pass the items on and reuse instead of keeping them around?

  • Jeff @ Sustainable Life Blog April 30, 2012, 1:13 pm

    I buy some used items, though honestly not as many as I’d like – I live in a smaller town so craigslist and that sort of thing arent really heavily used.

    • retirebyforty April 30, 2012, 4:05 pm

      I guess that’s true. Craigslist works much better in a bigger city.

  • Steve April 30, 2012, 5:24 pm

    I buy what I can used. We get almost all of our toddler’s clothes used. (We have never paid $3 for a single shirt, that seems high!)

    However the first car I bought used was a lemon and perhaps it scarred me. Or perhaps I got fixated on a model that had a shortage on the used market at the time. OTOH the price of our particular vehicle has actually gone up since we bought ours – I don’t think I could resell it for the new price today, but I certainly think the depreciation curve hasn’t been nearly as steep.

    Also, buying used is a lot more effort. I have been trying to find a ladder on craigslist but not only does it take the time of searching, but then you have to drive to someone’s house, check over the item carefully, and do any negotiation. Meanwhile I have been to the hardware store multiple times where I could have just bought a ladder. So now I still don’t have a ladder even though I have spent time trying to find one on Craigslist.

    Ladders are a bit of an odd duck in that they don’t seem to have the drastic depreciation curve that other consumer goods do. I think it’s odd in the USA that items lose 50%, 75%, or even 90% between “new” and “used” status. The amount of utility you can get from the item almost certainly doesn’t go down that much. (To compare, even a threadbare worn out pair of jeans probably retains 10% of its initial utility. I guess.) I think part of it may be that amount of time it takes to seek out and perform a used item transaction as above. People’s time in the US is indeed quite expensive – and rightly so, as we are the most productive people in the world (as hard to believe as that is!). I don’t think that you would be able to get something for 90% off in third world countries just because it wasn’t in a store.

    • retirebyforty May 1, 2012, 11:50 am

      We can probably find cheaper kid clothes at garage sales or online, but we’ve been going to consignment sales so I guess they have a bit more overhead. I think you’re right about ladders. I sold my ladder for 80% the cost a while back. It’s still good as new and when you need a ladder, you need one. Thanks for your comment.

  • krantcents April 30, 2012, 5:30 pm

    One of my cars is heading to zero! It is 17 years old and worth roughly 10% of the original cost. I want to replace it, but I may hold off.

    My son loves thrift store stuff. He has found some great stuff.

    • retirebyforty May 1, 2012, 11:51 am

      Will you replace it with a new car or a recent model used car?

  • Julie @ Freedom 48 April 30, 2012, 6:03 pm

    Amen! I hear so many people talk about how they “don’t do” used! As in… they won’t buy someone else’s old car or someones used clothing. So many of my friends refuse to purchase a used house because they don’t want to live in “someone else’s dirt” or live with someone else’s floor plan.

    Thanks for the reminder that buying used is often a smart, sound decision – with financial, economical and environmental benefits!

    • retirebyforty May 1, 2012, 11:52 am

      I didn’t like used stuff when I was younger, but now I prefer it. 🙂 It’s better for the environment and our wallet.

  • SavvyFinancialLatina April 30, 2012, 6:54 pm

    Buying used is awesome. First of all, it’s new to me. Second of all, someone else’s throwaway is my treasure! 🙂

    • retirebyforty May 1, 2012, 11:52 am

      You’re right! I’ve taken quite a few things from our building’s trash area. Some people just need to make room.

  • TM @ Young and Thrifty April 30, 2012, 9:02 pm

    That’s why you buy assets instead of consumer goods right? I know that cars often get listed under assets on a balance sheet, but I’d rather pay for the basic transportation and invest my money where I can going to see positive return going forward. It seems so simple, yet the reality appears to escape so many people. The graph doesn’t lie right?

    • retirebyforty May 1, 2012, 11:54 am

      I love buying assets, but we still need to buy consumer goods sometime. 🙂
      I don’t like listing the car under assets either.

  • Crystal @ Prairie Ecothrifter April 30, 2012, 9:19 pm

    Great advice! It took me until my mid-twenties to realize how many items you can buy used and sell for the same price years later…cars, foreclosures, and basic items that do not change much. That’s why my car was new in 2005 but my husband’s car in 2009 was used, lol.

    • retirebyforty May 1, 2012, 11:54 am

      It was the same with me. When I was younger, I like buying new things. It’s so convenient and shiny, but you pay for it.

  • Joel May 1, 2012, 6:45 am

    While I agree that buying a used car is often a better value, there is a key graph missing to go along with the depreciation graph. That is the graph of maintenance costs by vehicle age. For instance the maintenance cost of a three year old car is nearly 0 (especially while still under warranty), while even at five years old a car can require several hundred if not a few thousand dollars worth of maintenance. My wife’s 5 year old car cost us over a thousand dollars worth of maintenance last year alone and it would have been much more if I didn’t buy the one major part used.

    The repairs were a dead A/C compressor (bought used for 225 vs. 1200 new) and 2 motor mounts along with a stabilizing bar under the engine. Yes I know that A/C is not a requirement, but tell that to most wives. And this was on a 2007 vehicle with ~60k miles. At a dealer or most repair shops those repairs would have been 2000+since most places will not put in a used A/C compressor.

    • retirebyforty May 1, 2012, 11:56 am

      Thanks for the reminder. I will have to search for the maintenance graph and add it to the graphic.
      Our previous car (’98) cost about $1,000/year to maintain and when it blew the engine, I gave up and got a newer car.

  • Brian May 1, 2012, 12:32 pm

    My former boss would always tell me that the most stupidest investment you can do is to buy a new car. It is one thing that depreciates as soon as you leave out the dealership.

    • retirebyforty May 2, 2012, 8:48 am

      I agree that a new car is a stupid investment, but if you have plenty of money, you can splurge a little.
      We just need to know that it is money down the drain. 🙂

      • Steve May 2, 2012, 8:54 am

        I don’t think we should be using loaded words like “stupid.”

        Ever think that the depreciation rate on clothes and other minor consumer goods is much higher “as soon as you leave the store” – up to 90%! But nobody ever says “the stupidest investment you can do is buy new clothes.” If anything, we should be happy that used cars are so easy to sell for most of your money back.

        The choice between new or used car is not as clear cut as “never buy used.” It really depends. There is utility in buying a new car, otherwise nobody would ever do it.

        • retirebyforty May 2, 2012, 10:01 am

          I’m only using stupid in conjunction with investment in this statement. 🙂 I think a new car has value too, but it’s not an investment.
          I like new car for peace of mind, low maintenance, and the latest safety equipment. We have a baby and only share one car so we really need it to be as safe and reliable as possible. Buying a new car is perfectly valid, but it is not a good investment.

          • Steve May 2, 2012, 10:21 am

            Hmmm. Well is a car an “investment”? It’s an expense. An investment is defined as something that is expected to go up in value, right? On the other hand you can “invest” in a vehicle in order to get to work, earning more than you spent on the car. You can also get a car to drive to yard sales to save money on other things, I guess, though I am not sure if that counts as an investment or not.

  • i do go to thrift shops to buy used items and I always get excited whenever I do! The experience of finding rare objects although used but still looks very new and unused gives me a thrill. However, for sanitation and hygienic reasons, I don’t shop for clothes, especially lingerie, underwear, and socks, as well as chinaware and silverware. I only limit myself to furniture and decorative items when buying from used items from thrift shops or garage sales.

    • retirebyforty May 2, 2012, 8:49 am

      I haven’t seen much underwear type of stuff at the thrift store. Baby clothes seem fine to me. We always wash them first and I don’t think there is a sanitation problem. Furniture is a good item to buy used.

      • Steve May 2, 2012, 8:55 am

        Think about it – the first time your baby poops all over their clothes, it’s had poop on it. Might as well buy somebody else’s poop and save some money.

  • Karen June 23, 2012, 10:49 am

    Cars definitely depreciate at different rates. Some decline very steeply in the beginning and then flatten out, some decline much more slowly. It’s actually pretty interesting. You can pick different cars on this site http://www.usedautograph.com and see a graph of actual sales values, which shows depreciation pretty clearly. Enjoy!

  • nematode June 2, 2015, 5:37 pm

    A 15 year old used car will not depreciate much anymore, per the flattening of the chart, but the cost of repairs, even for common popular brands like Toyota, will surely exceed the value of the car shortly after. For example, it is not uncommon to have transmission problems, or engine oil leaks, at 15 years with almost 200K miles on it. It makes no sense to pour money inot a car that has developed these issues, due to normal wear and tear, and the repairs cost more than the car itself. Additionally, reliability of a 15 year old car is really questionable, unless it has been kept behind a showroom glass window; otherwise, the car is a problem waiting to happen. It may heat up, electric failure, transmission, starter, belts, you name it, it is all just waiting to fail not-so-unexpectedly. That is the main reason why, most of the cars we see daily circulating are not older than 10 years. People seek reliablity, not just high residual values.

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