Written By: Corey Janoff
If you read our post from last week, Financial Planning Made Easy, one of the concepts I discussed was around spending. Specifically, in order to achieve financial independence, you must spend less than you earn. Easier said than done. Well, a simple way to help curb your spending is to stop replacing items that aren’t broken. If it ain’t broke, don’t replace it.
Against better judgement, I’m going to pick on my wife for a minute. We are expecting another baby this spring. (Thank you. Another boy. We have thought about names, but still haven’t decided on one yet. Yep, back to no sleep for a while. Yes, I’ve heard: with two kids we have to go from playing zone defense to man-to-man. We’re going to see how we can handle two before considering a third).
In preparation for a new baby, my wife has been looking at new baby carriers. For those of you without kids, these are different from cat carriers. Picture Zach Galifianakis with baby “Carlos” in the movie, The Hangover. You can carry the baby on your back, in front, facing towards you, facing away from you, etc. Very customizable.
Currently, we have three baby carriers. One is basically a long blanket that my wife can wrap around herself and keep the baby held snugly against her. Good for the early months. The second is like the one from The Hangover and that Taco Bell commercial. The third is more of a hiking backpack, complete with rain cover and all. We have baby carriers for all scenarios. This is in addition to two strollers and a Radio Flyer wagon. We can carry all of the kids on our street at once if we have to.
So when my wife is looking for new baby carriers online and I ask her, “Why do we need another one?” it is more of a rhetorical question. I don’t want to know her answer. She claims one doesn’t fit her comfortably and the other will be too warm in the summer. First world problems.
We have three functional baby carriers. None are broken or have holes in them. There is absolutely no need for a new baby carrier. Waste of money.
Long-story short, we’re probably getting another baby carrier. Happy wife, happy life!
Reduce the Frequency of Upgrades
We all have purchased new items at some point in time, even though we had a perfectly functional one already. We just like new stuff. It’s alright if done every once in a while. Especially if you are already on track to achieving your financial goals. However, the new baby carrier, while financially ill-advised, is more of a euphemism for those bigger unnecessary purchases in life.
Does your car really need to be replaced, or do you simply want a new one? At the end of the day, a car is nothing more than an object to help get you from point A to point B safely and efficiently. For most people, especially if you live in the suburbs, owning a car is probably more financially beneficial than taking Uber or Lyft everywhere. But a car is a big expense. And it is a depreciating asset, meaning it goes down in value over time. Instead of purchasing a new car every 5-7 years, if you can hang onto your cars for 8-10 years (or longer), you will end up better off financially in the long run.
Let’s look at two people – one buys a new car every six years, and the other buys one every 12 years. We’ll assume each person pays $40,000 per car. There are definitely cars out there for a lot less and a lot more.
The person who buys a car every six years might own ten cars during their adult life. At $40k a pop, they spend a total of $400,000 on cars (not counting inflation) during their lifetime. This assumes they pay cash and don’t finance the cars. If they pay interest on all these vehicles, they may end up spending considerably more. Now, if they can sell their existing car for $15,000 every time they buy a new one, they will recoup $150k, netting a total of $250k spent on vehicles during their lifetime.
The person who buys a car every 12 years will maybe purchase five cars in their adult life, spending a total of $200,000. If they can sell their existing car for $7,000 each time, they will recoup $42,000, netting a total of $158k spent, or $92,000 less than the first person. $92,000 is a lot of money! That could be a several years of college for your kids, or multiple years of retirement savings. Are you willing to work an extra handful of years to pay for college or be able to retire, for the sake of upgrading your cars more frequently?
Unlike cars, real estate tends to be an appreciating asset. However, the transaction costs of real estate are absurd. Every time you sell a property, you pay about 6% of the sales price for commissions and closing costs. This is in addition to any repairs, upgrades, paint, landscaping, moving things to storage, etc., you did in order to get your house presentable for prospective buyers.
On top of that, when you buy your new home, you have your standard prepaids and closing costs (assuming you are taking out a mortgage). Don’t forget about moving expenses, new furniture, and any repairs/paint/carpet/etc. you want to do to the new house.
By the time you are settled into the new house, you might have ended up spending the equivalent of 10-15% of the price of the home you are selling, and 5% of the home you are buying! If you are selling a $400,000 home and moving into a $600,000 home, you might be spending around $75,000 in total that you wouldn’t have spent if you simply stayed put! In most cases, the longer you stay in your home, the better off you will be financially.
have had next door neighbors who claim they relocate to a new house every six years. And they get new furniture every time! I don’t know what they do for a living, or how financially well-off they are, but that is insane! Unless the real estate market it constantly booming, they will likely never break even on the transaction. It takes about five years on average of home appreciation just to recoup the transaction costs on a real estate purchase.
Homes and cars are the big-ticket items that apply to most of you. There are plenty of other things though, when added up, amount to a lot of wasted money.
Clothes, shoes, furniture, electronics, phones, fishing gear, golf clubs, jewelry, dishes, cutlery, and the list goes on. The more money people make, the more content they are with spending it on unnecessary purchases.
Remember when you were in college and literally drank out of the same cup for four straight years? You maybe washed it once a month. You would wash and re-use Ziploc bags. You wore the same jeans three days a week for four years (or maybe for three years after the freshman 15 forced you to buy a new pair). You survived and managed. Life was great! Probably was better then than it is now for you.
You don’t need new stuff to be happy. Sure, new things can be nice, but the novelty wears off quickly. And the financial ramifications can have an impact that lasts a lifetime.
So unless you are financially independent, or on track to achieve financial independence in the timeframe you want to, think twice about upgrading things that aren’t broken. Do you really need it? Can that money be put to better use elsewhere?
Buy quality, take care of it, and if it ain’t broke, don’t replace it.