With every dollar of earned income, you have two choices. You can spend it or save it. If you save it, you’ll probably end up investing in something. And of course, you invest because there is a reasonably good chance that the investment will appreciate in value. Why else would you choose to buy stocks, rental houses, or anything else if the expected return on your investment was negative?
It doesn’t matter what you invest in, you expect the value to increase, and your wealth to grow. That’s the basic premise behind this blog and our frugal lifestyle. If there weren’t any reasonable investment opportunities to grow our wealth, we’d probably just spend it all like 95% of Americans. Only an idiot would buy stocks if the stock market was expected to continually decline in value, right?
But this article isn’t actually about saving and investing, even though that’s always the best option. Today I actually want to talk about the other side of the equation that dominates most people – spending money.
When talking about spending money, I like to categorize expenses into a couple of broad categories. The first involves purchasing memories in the form of vacations, meals, and other similar experiences that last only a brief while. These expenses don’t involve tangible goods or property. After the money is spent and the experience is over, all that remains are the memories.
Memories can get really expensive, really quickly. The only way to reduce the price of memories is to properly plan ahead. For example, you can vacation for free by travel hacking. You can invite friends over and cook at home instead of dining out, or you can choose to eat at restaurants that offer coupons or great deals. If you impulse spend or continually pay retail price for any of it, you’re probably going to be broke.
And before I get any commentary shouting at me, “but memories are worth paying for!” please know that I partially agree. The greatest joys in life often involve memories with friends, family, and other worthwhile souls. But whoever told you that memories cost a fortune? That’s just not true. By properly planning ahead, embracing frugality, and avoiding impulsive, emotion driven transactions, you can create an unlimited amount of memories for roughly a nickel a piece (I’m keeping track)(I’m joking, but they don’t cost much).
Most other expenses in life involve the exchange of physical goods or services. Someone produces a product, and sells it to a willing buyer. Examples would include cars, electronics, clothing, furniture, dishes, housing goods, and pretty much everything else that you purchase in a local shop.
This category of expenses seems to be especially problematic for people. Any time the average American needs something, wants something, or covets something, they run out and buy it at retail price. Some of these people know they are getting a bad deal when the pay retail, and just don’t care. Worse yet, others are somehow convinced that paying retail prices at big box stores like Walmart actually is a good deal. Go figure.
I’ve already written about the importance of buying used, so go ahead and read that first. The principle of shopping around and buying used is absolutely crucial. If you run out and buy something new, it is going to depreciate in value very quickly. If you ever try to sell that item, you will almost always receive less than the price you paid new. This holds true for almost everything you can imagine except for homes and other investments.
New cars are an excellent example. A new subcompact car (the kind you’d want for hypermiling) might cost $20,000. Two years and 22,000 miles later, it’s worth $12,000 if you’re lucky. And why is the value so diminished? Not because it has problems, or isn’t reliable, but because new car prices are heavily inflated to pay for shipping, dealer overhead, sales commissions, new car smell, and other ridiculous costs. You can buy extraordinary vehicles for $5,000-$8,000 all day long. I’ve bought roughly 10 of them, driven them around for a few months or years, and then flipped them all for a profit. Heck, the 1996 two-owner Saturn we share was only $1,700 when we bought it four years ago. It’s still running great.
I’ve always enjoyed playing video games, and I’ve owned almost every video game console known to man over the last 15 years. I have stood in line for more than 48 hours straight (2 full nights at Walmart!) to reserve new consoles at launch. Unlike many of my friends, my intent was not to play the systems, but to resell them at a fat profit to impatient people. When I’m looking to buy a console for myself, it’s all about the right one.
As an example, earlier today I found a Playstation 3 (PS3) on sale at a local pawnshop that I frequent. It included the console, 1 original controller, 2 decent games, plus the Playstation camera and Move controllers. After some negotiating with the manager, the total price out the door was $100.23 with tax. Are you kidding me? I could sell the bundle right now for roughly twice that price on Craigslist. But better yet, I could play it for 2 years with my brother, then sell it for $135 on Craigslist. I’ll make money on it either way.
That stands in sharp contrast with the twelve Playstation 4 (PS4) consoles that I purchased late last year at launch. Brand new, they were $435 with tax, and I averaged about $110 profit on each. People were willing to pay almost $550 per console. Sure, it’s their money and their decision, but that’s crazy! I’ll be able to pick one up for about half that price within the next few months. Why not just practice a little restraint and wait 9-10 months for demand (and of course, the price) to plummet?
Do you understand the importance of timing in this process? Timing is everything. So is patience. You’ll always pay too much if you are in a hurry to buy. And you’ll always make much less if you are in a hurry to sell.
I’ll wait patiently for months if necessary to secure a good deal. Unless I absolutely need the item, what is the hurry? Delayed gratification is good for so many reasons. It forces you to think about the purchase a little longer and decide if it’s wise. It also allows time to consider alternatives, do more research, and negotiate with sellers.
The same holds true when selling. Are you in a hurry to sell? If you are, people like me can smell it. Try to avoid being a rushed seller, because it’s not profitable.
If you aren’t desperate for the money, you don’t need to sell the item today after you get one low-ball offer. Take your time and list the item for more than it’s worth. And don’t be shocked when someone offers the full asking price without any negotiating. It happens all the time.
We can take selling one step further. Sometimes it is necessary to sell an item before it breaks or you get bored with it. We’ll go back to video games because they are yet again, a great example. Nintendo released a console in 2006 called the Wii, and subsequently released another console in 2012 called the Wii U. I owned the original Wii for many years, and was aware of the date on which they would release another console.
It was not difficult to predict that the price of the original Wii console was going to plummet once the new console was released. That happens with every electronic. In light of that, I sold my Wii 8 months before the new consoled released, and locked in a reasonable sum of money. Had I waited 6-8 months, I would have received half of that amount.
This happens ALL the time, and goes to show why timing is crucial in buying and selling.
Selling an older car while it still runs well is often a great idea. Instead, many people wait until it’s broken down to sell, then basically give it away. Why would you do that? Almost any well running car with less than 200,000 miles is worth $1,500-$2,000 if you’re a patient seller. Why wait until it’s worth $450 to sell? Take the money off the table by selling it, then supplement the sale price with a little savings and purchase a nicer car.
These methods work on cars, or video games, or computers, or furniture, or anything else you can imagine. Being patient and timing the market will allow you to secure an unlimited number of good deals.
And what exactly is my definition of a good deal? Well, it’s pretty simple when we are talking about anything that can be resold. A good deal is the price at which I know I won’t lose money when I’m ready to resell the item at some point in the future. At first glance, this may seem crazy. Do I actually believe that I can buy most goods, use them for a period of time, and then resell them without losing money?
Absolutely I do! I’d take it one step further and suggest that most of the time it’s possible to buy, use, then resell at a profit! That is always my intent when I begin hunting for any item.
It doesn’t matter what item we’re talking about, the process is the same. It first involves research to find the lowest retail price point. Then it requires considering used options and evaluating prices on sites like Ebay and Craigslist. Finally, it requires patience and diligence to find the one you want, at the lowest possible price.
Pick anything that can be resold, and I promise that someone is selling it used for way too cheap. It’s your duty to hunt, search, and peck your way to profit. If you’ll embrace patience and self discipline in the buying process, you’ll always find inefficiencies and anomalies that are ready to be exploited in the marketplace. Take advantage of that and you’ll never lose money!
Avoid impulse purchases. Always do research before you buy.
If at all possible, look for a used version of the item. The original buyer ate most the depreciation.
Be patient when looking to buy. Always evaluate the options, look around, and take your time.
Make low-ball offers when you aren’t in a hurry. Never be in a hurry!
Negotiate for the item and don’t buy unless you are getting a good deal.
Evaluate purchases in light of their future value. A good deal should allow you to sell the item in the future without losing much, if any money.
Sell stuff you don’t use. List it for more than its worth and lower the price slowly.
Sell stuff at opportune times. Don’t wait for the upgraded version to hit the market. Don’t wait for stuff to break. Sell now, then buy again later when the price plummets.
Always be patient in buying and selling. Let other people pay the impulse premium.