We don’t pay for our furniture. I haven’t paid for my watch. Also I haven’t paid for my HiFi system. If I was a little bit smarter, we wouldn’t be paying for our car either. On the other hand I have paid way too much for computers. That is not going to happen again.
How much does stuff a.k.a. “fixed assets” cost?
Depreciation expense = (Cost of fixed asset – Salvage value ) / Years in serviceConsider our dining room set. It was bought used for $75. We had it for 2.5 years, took good care of it, and sold it for $70 since one of the chairs had broken. The expense of this set was ($75-$70)/2.5 = $2/year. Okay, so we do pay a little for our furniture. There are three important conclusions here:
- Depreciation expense is a great way of arguing for buying quality. If something costs 50% more but lasts twice as long, it is generally cheaper.
- If something lasts a long time and does not change technologically, inflation is on your side. This is the case for houses, classical motorcycles, jewelry, and good amplifiers.
- Depreciation expense argues in favor of buying used. If something is bought used you’re paying someone else’s scrap value. If you take good care of it, their scrap value becomes your scrap value and you can sell it for the same amount.
Unfortunately consumerism is not on your side. Consumers like novelty. Consumers also steer away from quality and focus on quantity. Many manufacturers cater to these wishes by building shoddy but inexpensive products that fall apart after a few years. Greenies typically blame the manufacturers, but these businesses are merely stepping up to demand. This is why quality is so hard to find. It is the consumers that must be blamed. Notice that savvy businesses never use inferior tools in their production lines. They know that quality is cheaper in the long run. They focus on quality and prudent savers should do the same.
Originally posted 2008-02-11 07:26:30.