Tuesday, April 24, 2007

Spend Smart and Avoid that Sinking Feeling

One way to increase the amounts you save for retirement is to buy high quality goods and make them last by taking care of them. That way, you'll devote less money to buying things and save more. A look at cars illustrates the point.

A new car loses value the minute you drive it off the dealer's lot. In the first three years of their lives, many cars lose half their value. After five years, the total loss might be 70%. If you buy a new car every five years, you will lose up to 70% of the value of the car every five years.

But if you buy a new car and keep it for ten years, you'll lose around 70% of the value in the first five years, but only about 20% in the next five years. That beats having to make payments on a new car. Sure, you'd have to drive an older car. But, if you save the money you didn't spend on a new car, you'd have a larger net worth. Considering the price of a new car today (on average, something like $28,000), we aren't talking about pocket change. There's nothing wrong with driving an eight-year old car, especially if you have a better retirement as a result.

Smart spending means buying high quality, long lasting goods, and maintaining them carefully. Do this as a way of life and the money you save can go a long way to building wealth.

Consumer goods depreciate in value. They do not build wealth. Cars, furniture, TVs, entertainment equipment, computers, sports equipment, home furnishings, clothes, shoes, appliances, backyard grills, and lawn tractors all lose value over time. It's fair to say that the average American household contains a great big mass of depreciating goods that detract from one's ability to build wealth. And consumption items like cable TV, restaurant meals, pet grooming services, and $200 haircuts have no monetary value after you buy them. Of course, you have to buy some consumer goods and services to live in today's world. Heaven forbid that you should be unable to watch the shows that everyone else is talking about. Maybe you work hard and feel you deserve nice things. Okay. How about a nice big retirement portfolio?

Limiting the amounts you spend on depreciating goods allows you to invest more money in appreciating assets. You'll have less of a sinking feeling about your finances if you spend smart and invest more.

June 24, 2007 Answer to Comment Below: your debt-to-income ratio should not, if you are prudent, exceed approximately 35% of pre-tax income. This ratio is commonly recognized in the United States, and the figure for residents of other nations may be different because of differing tax and social welfare systems.

1 comment:

Omar said...

hello, you had answered on

that total debt payments should be no more than 35% of total income. Is it 35% of pre-tax income or 35% of my monthly paychecks (post tax deductions)?