I’m a fan of not buying expensive things. I always try to look for the best deals, use coupons on items when I can, use discount apps when purchasing online, and refrain from buying things I don’t need. However, there are times when I will spend money on things with a hefty price tag that add more value than the price I pay.
Things like a car, computer, house, apartment spaces, college, or a wedding. I’ll be talking about my rule for spending money on depreciating stuff like a car or a computer and not about things that are value adding like weddings, colleges, or real estate.
Depreciating assets can be a necessity. Everyone needs a computer these days and at least a car. Yes, you can take public transportation or have a bike to go to work and get groceries but it is highly inconvenient (for all four years in college, I didn’t own a car and I can say how much I detested not having easy transportation). Asking friends to go to groceries stores didn’t help either because I didn’t want to ask frequently and become a pest.
$30 and $100 Rule
My rule is to spend a maximum of $30 a month for things that are in the thousands and to spend a maximum of $100 a month for things in the tens of thousands. My Macbook Pro cost me about $1100 after taxes and my car (that I will never buy new) cost me about $10,800 after taxes.
Why This Rule for Maximum Purchase Price Makes Sense
1. No difference. Computers are a commodity. There are nitty gritty differences between one computer and another but most provide the same functionality. You can get on the internet, run excel, or finish work stuff. The extra cost to more expensive computers doesn’t provide the extra functionality that should come with the extra cost. It especially applies to cars.
The extra slick look and the feel of a newly made Mercedes Benz might look cool to others, but the functionality of the car is the exact same, if not worse than a 5 year old car with 40,000 miles on it. Both gives you transportation, air conditioning, and cushion but the 5 year old car probably still has a better fuel efficiency rate.
Spending less money on a car to spend less money on gas can’t be beat. Maintenance cost could be higher but not that much higher if you had taken good care of it during its youth years.
2. Buying new has instant depreciation. As soon as you sign your name on the dotted lines in the dealership, put in your keys, and step on the accelerator, you just lost 10% of the car’s value. Furthermore, a car loses 10% of its value on average after the first year, as the car is priced in to have a useful life of 10 years. Higher purchase price means higher dollar amount of depreciation and paying extra money for a new car to lose extra money for depreciation doesn’t make sense.
3. The joy goes away after a week or two. I love the feeling of buying something new. The packaging shows that new product look, it’s something I’ve never had before, and I can show off to my friends. Yeah, take that Alex! I have this feeling for about a week or two. Then it becomes like any other day. I wake up, don’t have time to appreciate the fine details of my new car or laptop, go to work, and go about business as usual.
All of a sudden, I don’t appreciate the slick design of the Macbook, the smooth feeling of the mouse pad, the Apple sound it makes when I press “on.” I know if I had paid a much higher premium for the products, I would have buyer’s remorse and would hope that I haven’t missed the return deadline.
4. You’ll look cool!!… for a week or two. You show up to work in a brand new Model S Tesla and for a short time, your environmentally friendly friends are asking you for rides and saying how awesome your car looks. This will not last a long time. They might still ask you for occasional rides even after a while, but the euphoria dies down and all they will see is that you are driving the same car since the dawn of time.
Do the Math!
Depending on how well you take care of it and how much you use it, a car can last about 10 years. If you drive between 8,000 – 13,000 miles a year, a 10 year estimate is doable and likely. I project that I’ll drive my car about 5,000 miles per year because I don’t use it for anything else other than going to work (5 miles to and back), grocery shopping (varies) and miscellaneous but everyone’s transportation needs are different.
As far as life of a car goes, it’s up to you to decide on the most accurate number but 10 years is a good guideline. $10,800 / 10 years = $1,080 / 12 months = $90 / month. Paying 90 dollars a month to me is cheap for the value of having easy transportation. It saves me time of going to a bus station, waiting for the bus station, and the convenience of not having to ask someone.
For a Macbook, I project that I will have it for 5 years. $1,100 / 5 years = $220 / 12 = $18 a month. A Macbook can last 5+ years but I use my Macbook everyday for at least 5 hours and I want to be conservative with my estimates. 2.5 years left to go!
One caveat with this rule is that it’s not exactly like paying $18 a month for a Macbook because you’re paying everything up front. If you paid only $18 a month for 5 years, you could have invested the other $1082 the second month, $1082 – $18 + interest the third month, etc. While it’s not exactly the same, it can be a great rule to cap your spending.
You can also argue that buying a Macbook is a premium priced decision to the alternative of buying a Windows computer but from my personal experience, Windows computers break down within the first two years, mouse pads aren’t as smooth, easy to catch a virus, and the cheaper priced ones have a slower processor, making me lose valuable time that could be used towards more productively.
Positioning for Long Term Success
Use this rule to not only cap your spending limits but to visualize how much you are paying per month. This rule only applies to products and services not related to medical bills. I will never use this rule when it comes to deciding whether to get surgery or not.
Following this rule consistently will help you lower your expenses over the long term and discipline you into researching heavily before purchasing. This can lead to a more informed decision and not having buyer’s remorse.
Readers, do you have a rule when making a large purchase? Do you calculate relative pricing more than absolute pricing?
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
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