There are two paths to becoming wealthy. One is earning more. Two is spending less. This post discusses types of spending in a way that will help you spend less over long periods of time.
In general, all items you buy are either durable or consumable. A piece of furniture is durable. A starbucks frappé is consumable.
Durable items can be further broken down as being either appreciating or depreciating asset. More cars are depreciating assets whereas most houses are appreciating assets.
A special class of item can be considered called a “speculation.” This would be buying Nintendo’s Mini SNES release this year, beanie babies a few decades ago, or tulips a few hundred years ago. These are items that you purchase and posses for the purpose of reselling at a future point in time at a profit (or loss if unlucky). We might also refer to these items as “inventory” because by engaging this type of commerce, you are effectively becoming a low volume retailer.
There can be overlap in these categories. You might buy a painting from a local artist. The intention of this painting is to decorate your home. It’s meant to be a durable good. It may be partially a speculation in that the artist may become famous and you may be able to resell it in the future at a profit.
It’s possible to split individual items purchased into different categories, weighing them by cost paid. For example, suppose you needed paintings to decorate your home. You have performed research and determined that the minimum cost to decorate your house to your needs with a series of art pieces is $1k, however a local artist that is up-and-coming might sell you the same number of paintings for $2k. You could classify the paintings as half durable goods and half speculation. The price floor exists of $1k because even if the artist never becomes famous, the paintings were worth $1k because that was the minimum you’d need to spend to decorate your walls. Therefore these paintings have $1k speculative cost.
It is important to understand where on this spectrum all of your spending goes if you desire to gain wealth over time. The worst purchases are consumable. They are a wealth sink. Here are some specific common examples:
- cell phones and service
- high end coffee
- apartment rent
- house property tax
- most automobiles
Of course, you need to eat and you need a place to live. It’s not possible to cut consumable costs to zero unless a third party is giving you necessities of life for free. Notice that both rent and home property tax is listed. Both are consumable purchases and both are included in the sample list to highlight that neither renting nor owning a home is ideal in all circumstances. People selling real estate argue that renting is throwing money away; they neglect to mention that owning a home is throwing money away in the form of property taxes and homeowners insurance. Suppose rent is $20k a year for one renter and an equivalent house would have $5k per year of property taxes and $1k of insurance. Ignoring depreciating of appliances/roof/repair costs, the renter is not “throwing away” $20k per year, but only $14k per year relative to owning a home.
One strategy of wealth creation is to shift as many consumable and depreciating durable purchases into appreciating durable items. Possible examples:
Owning a house instead of renting
Buying a classic car that appreciates in value and driving it around as a daily driver assuming operations costs don’t negate the appreciation value (e.g. reduced gas mileage, higher insurance costs, higher maintenance costs)
Buying hardwood furniture instead of Ikea crap. Depending on what you paid for the hardwood furniture, or who made it (a popular maker), the furniture may appreciate in value. (e.g. an Eames lounge chair purchased 30 years ago would have appreciated in value over time)
Another strategy is finding low-cost speculative plays to add to your durable goods purchases. Specifically, if you can buy a standard item for $X, but you can buy a rare/collectable one for ($X + $Y), if $Y is small, then you can do a speculation play on your purchase. For example:
Buying art from a local artist who is young and not charging much above market cost to get your house filled with shitty framed art prints.
Buying handmade furniture from a young startup woodworker.
Spending more for your house to be in an area that may have greater price appreciation over the next 10 to 20 years.
The goal in this strategy is to avoid speculative plays that are much more expensive than the price floor. If framed Art Prints from the internet costs $1k to fill your house at the very cheapest and an local artist charges you $1100, then that’s $100 speculative play on the artist becoming famous. Worst case, you only lose $100, not $1100 because you were going to buy art anyway.
The last strategy is with regards to depreciating durable goods. Cars, laptops, cell phones, etc. The goal is if you are buying new, to buy the items with the lowest depreciation schedule. Macintonish Laptops have the highest resell value after one year than any other brand laptop. The cost of depreciation is lower than if you bought a Windows-based Dell. However, if you are buying used, you may prefer items with the highest depreciation schedule. For example, if you’re buying a 1-year old car, then buying a Honda Civic that has minimal depreciation will not reduce the price much from retail and you might as well buy new. Whereas if you’re buying a 1-year old car, then buying a sports car with high depreciation makes more financial sense.