Monday, September 27, 2010

Why I often buy used. Impact on the Balance Sheet.

When we think of the balance sheet we often think only of major purchases such as a home, cash, investment portfolio, or vehicles. All of these things clearly are important but applying the same principles to all purchases can assist to insure that we are getting the best deal for our money and achieving frugal objectives.

Simply put: the left side of the balance sheet shows our assets, the right side shows our liabilities. The difference is our net worth.

Let's look at a sample transaction to see this in play:

Let's say that you have $1,000 in the bank and you want to purchase a t.v. Happily the family heads to the store and finds the perfect item on sale. The t.v. is reduced from $1,300 to $895. Even with tax added you can afford to buy it with your allotted $1,000. The deal is made and home you go. Happy as can be. So how much is that t.v. worth? Worth is the amount that YOU can sell it for right now after it is brought home from the store. Is it $1,300, $895, or something less? Check Craigs list, your newspaper ads, and call your friends and relatives and ask them how much they would be willing to pay for your brand new t.v. That is the true current value and it will probably be between $450 and $700. Yes, used is used and everything you own is now used. The same is true with cars, furniture, clothing, and toys. The value of what you own is the value that you could sell it for today. This probably makes you feel angry and so you want to say I'm wrong but before you do try the experiment of those items in your home. How much did you pay for them and how much could you sell them for?

What does this have do to your balance sheet? Simply put: you have lowered your cash by $1,000 and now have an asset worth at the most $700. Your purchase has lowered your net worth by $300. Now what if you have made this same purchase using a credit card or easy payment plan? You will have added a $700 asset offset by a $1,000 debt PLUS all the interest. So the balance sheet is still down by $300 PLUS interest and you are obligated to pay. If you choose the easy minimum payment option the t.v. will probably be worn out and need replacement before it is even paid off. And, we all know what can happen with credit if you were to loose your job or have unexpected medical bills or car repairs. So add to this the risk that you may have late fees, ruined your credit, or have a t.v. that does not work while you are still making payments. If things get too bad you could always roll it into a debt consolidation plan and make payments for 20 years. Yes, it all sounds so dramatic that it would seem like I am exaggerating but isn't that exactly what has happened to so many people?

Multiply this whole scenario for everything you purchase that is new and all the money you have earned has the purchasing power to add value to the balance sheet of roughly half of what you paid for it. That's why they refer to them as depreciating assets. They depreciate the minute you buy them! It would almost seem funny if it was in some sci-fi movie where you buy a big item and every time you walk out of the store it shrinks to half of the size. Do this over and over and watch what seems to be your money flying out the window. So many are shocked when they finally do sit down and do a balance sheet and wonder where all the money goes. Sadly many think they just need more money instead of thinking what they need to do differently with the money they already have.

Same scenario: $1,000 in the bank. Your t.v. goes out and you want a different one. What can you do? Start shopping for a NEW (newer) used t.v. Search the ads, find someone who is reputable, ask if the warranty is still valid.  If you are able to find the $600 newer t.v. it is still worth $600 and you have kept $400 in the bank.  Your balance sheet has the t.v. instead of a portion of the cash but the value has not been diminished.

This applies to furniture, washers and dryers, purses (I have a $1 almost new Dooney and Bourke), even new cologne can be purchased on ebay because someone didn't like the gift they received. Most new washing machines cost $400 or more. Many used ones are available for around $150. What if it breaks in a year? Then get a another one. You can buy 2 or 3 used ones before you will spend as much as on a new one. The important thing about buying used is to observe carefully and ask a lot of questions. A machine that has been used by a family of six is going to have a lot more wear and tear than one that has been used by a little older lady who passed away. Purchasing from better neighborhoods tends to have better condition items also because they often buy new things because they are "tired" of the old ones or something new just came on the market.

Back to the balance sheet. What I'm saying is contrary to everything you have probably thought or heard in our consumer based economy. Don't believe me. The free worksheets on the side can be printed out and you can work the numbers yourself. Start with what you currently have and do some experimenting. How much did you pay for it? How much could you sell it for now? How much would it cost to replace it with new? Used? These are the things the retailers and advertisers don't tell you. These are the things that will help you maximize every dollar you spend and you may just get rich in the process. At the minimum, it will help you win the war while you are In The Trenches.
Deals abound right now as many people are cutting back and selling their surplus.  If there are things you have needed or wanted to purchase before running to the stores consider the impact on your balance sheet.  If you are able to find the item from a private party it may be the help where you both can benefit.


Anonymous said...

Works fine if you are in a city. in rural areas - not so much. No freecycle here, most people save what they have. Plus I wanted a good front loading washing machine that would last for many years - not going to find it used, not even on sale here.

So reducing needs works better than looking for used - for now, for me.

Carol said...

Thanks for your comments. Though I am now back in the city, my last 20years have been back and forth in the rural areas where I have a home. One thing in the rural areas is that word of mouth between friends and neighbors is a much bigger part of the process. Another good source is the bulletin boards at the grocery stores. And, of course, garage, moving, and estate sales. Almost forgot the fun auctions were I have really shot my wad on a number of occasions. :)

Olivia said...

Thanks for the post.

Each region has it's quirks. When we lived in a very rural area (4 hours from any major shopping), things that hit the second hand run were fairly worn, (think 4-year-old boy's pants). We ended up doing what the "locals" did by clustering our shopping trips, finding thrift stores in more metropolitan areas, doing without, or repurposing what we already had.

Presently we're in an area sandwiched between cities and rural places. So we have close access to great yard sales/thrift stores, great auctions, a pretty big flea market, and freecycle.

When we lived in the rural area, we just did without the TV.

Joe Plemon said...

To anonymous,
I live in a rural area and am able to find almost anything I want used. I have a very nice $1000 used TV I bought for $500 and many work tools that I bought for very little at yard sales. My son owns a $75 clothes washer and a $50 dryer. Like Carol said, if they break, buy another. To summarize...I love used!

Rafael Martin @ Credit Cards for Students said...

"if they break, buy another"

Well, there's such a thing as being too frugal, and I think that would incur more expenses than you think you just saved. Just be sure of the quality of the used stuff you buy.

Little House said...

A couple of years ago, our washing machine in our rental house died. We have had horrible luck getting our landlord to do anything, so we shopped a couple of garage sales and found a used washing machine for $25. It was much newer than the one the rental came with. Now that we're moving, we don't feel like we're wasting money on leaving that $25 washing machine.

Carol said...

Thanks for your comment. Glad you got a good deal! Today I drove by a garage sale and saw a $40 price tag on a dryer in the driveway. My head automatically wiped around until I realized that I did not need it. :)

FB @ said...

BF is a freak about NOT buying used items

Used clothes creep him out, used electronics make him paranoid

Me, I'm not so squeamish. I go with everything I can, used or free, but I just don't tell him.