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?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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