This last year, you earned $60,000 at your job, made $5,000 in the stock market, but……you lost $8,000 and you didn’t even know it! Kind of hard to believe, right? That you lost $8,000 and you didn’t even realize it? Believe it or not, it happens to almost all of us. Heck, I’m super frugal and I lost $2,000! “How?” you might ask. Depreciation. How much do you think you’re losing to depreciation?
By the end of this article (and after inputting your info into my new tool), you’ll know exactly how much you’re losing to depreciation!!
How Much Are You Losing to Depreciation?
So first things first…what really is depreciation?
According to The Street…
“When something depreciates, it reduces in value.”
It really is as simple as that. You buy something, you have it for a while, and you’re forced to sell it for less than you paid for it because it has depreciated in value.
So what are some of the top things that you buy that depreciate in value? And, how much is this impacting your overall net worth? Continue reading below and be sure to fill out the depreciation calculator (click the link to download the Excel file, open up the download, and fill out the Excel sheet!) to see how much you’re losing to depreciation!
1) Your Car
This is the one everyone thinks of when the word “depreciation” is uttered – and it’s because it’s one of the biggest purchases that you’ll ever make that goes down in value.
According to Trusted Choice, if you buy a new car…
- It will depreciate by 11% immediately once you drive it off the lot
- You’ll lose 20-25% by the end of year 1
- It’s value will dive by 46% by the end of year 3
- And, after 5 years, your new car will have depreciated by 63%
Buy a car for $30,000 and it will only be worth $11,000 after just 5 years. That’s a loss of $19,000 due to depreciation!
How much are you losing to depreciation on your car?
Want to know how much you’re losing to depreciation on your car? Here are some good rules of thumb:
- If you just bought your car brand new, here’s your formula… (Purchase price) * (20%) = your vehicle depreciation this year
- If your car is between 2 and 10 years old… (Your car’s value) * (15%) = your vehicle depreciation this year
- If your car is 11 years or older, depreciation is very small and basically negligible
If you don’t want to think too hard about this, just feel out the depreciation calculator tool!
2) Computers, Televisions, and Cell Phones
Ahh electronics. We all love them for the entertainment they offer us…but we should loath them for how much they cost us over time.
You may not realize it, but computers and electronics attack your wallet from two different angles:
- First, the industry finds better and better ways to put these machines together each year, which translates into a cheaper product
- Just like anything else, a used computer or TV will be worth far less than a new one
Because of the double-hit to your electronic’s value, instead of seeing depreciation of 15%-20% like on your car, you’ll experience a depreciation rate of 50% every year. Buy a computer for $1,000… one year later you can probably sell it for $500, the year after that $250…etc. etc.
How much are you losing to depreciation on your computer, cell phones, and televisions?
- First, list out all your computers and televisions and write down what you paid for them.
- Then, take 50% off the purchase price every year you’ve owned each item.
- Finally, take the current value for each and subtract it from the prior year value. Total up all your depreciation amounts and record that as your “Computer and television depreciation expense”.
Have you recently purchased a timeshare? I’m sorry to tell you, but your timeshare is depreciating as well…
It’s not because the building you own a portion of is going down in value, it’s because the resale market is flooded with them and there aren’t nearly as many buyers as there are sellers. Plus, maintenance costs on timeshares notoriously skyrocket with each passing year, making them less and less desirable for a second-hand buyer.
How much are you losing to depreciation on your timeshare?
As a rule of thumb, your timeshare will lose 50% of its value with each passing year. So, just like with computers and TVs, just write down the purchase price for year one and cut that value in half with each passing year. Then take the prior year number and the current year number and subtract them. THAT’s the depreciation dollar amount for your timeshare.
All these guy toys have motors in them…which means they pretty much depreciate like cars. Here’s the recap on that:
- 11% depreciation minutes after the purchase
- Lose 20-25% by the end of year 1
- The value dives by 46% after just 3 years
- After 5 years, depreciation goes down 63%
As a general rule of thumb, these toys will go down in value by 20% in the first year and then 15% every year after that until the 10 year mark.
How much are you losing to depreciation on your toys?
I’m guessing that you’re catching onto this process by now. List out all your toys, then:
- If your toy is less than 1 year old, take 20% of the purchase price – that’s your loss due to depreciation
- If you have toys that are older than 1 year, but newer than 10 years, write down 15% of the current value on each of them
- And, if your toys are 10+ years old, don’t worry about it. The loss due to depreciation is negligible.
5) Video Games
My wife thinks video games are a waste of time. For the most part, she’s right. But on top of that, they’re a waste of money too!!
The popular site, “Which”, discovered this quite a few years ago when they conducted an experiment of their own. They bought a brand new Xbox game for $60, opened it, and then tried to sell it soon after as a pre-owned game. Guess how much money they recouped? $22. They basically lost $38 overnight just by tearing off some cellophane.
On average, video games will lose 70% of their value immediately after purchase. Then, they’ll depreciate about 10% each year after that.
How much are you losing to depreciation on your video games?
- How many brand new video games did you buy this year? And at what total price? Take that number times 70%.
- Of all the rest of your games, what’s the total resale value today? Take that value and multiply it by 10%.
- Add the two values together for your total video game depreciation this year.
A diamond ring might be a great investment…but as an investment in your future spouse and certainly not the ring itself. Most people don’t realize it, but the mark-up on jewelry is tremendous – often 100%-200%. This of course means that if you ever try to sell your engagement ring, necklace, or diamond earrings, you’ll likely only get a small fraction of your initial purchase price back.
Believe it or not, but the initial depreciation rate is much like a video game — at 70%. Buy a ring for $1,000 today, walk out of the store, then try to sell it back to them…they might give you $300 for it. Each year after that, assume it’s worth 5% less than the year before.
How much are you losing to depreciation on your jewelry?
- How many dollars worth of jewelry have you purchased this past year? Multiply that amount times 70%.
- Total up the current value of all your jewelry (remember, the value has gone down substantially over time) and multiply that amount times 5%.
- Add the two values together for your total jewelry depreciation on the year.
7) Other Media – Books, DVD’s, CD’s…
Dang, it just seems like everything drops in value like a rock doesn’t it?? That’s why you’ve got to be careful what you buy and how much of it you get on a monthly basis.
Books, DVD’s, and CD’s – they are no exception to this depreciation game. While I couldn’t find any exact depreciation percentages online, I’ve read quite a few comments like, “I’ve spent thousands of dollars…and my collection is probably only worth a couple hundred at this point.”
Let’s face it, nobody wants a bunch of books, DVD’s or CD’s crowding up their houses anymore. They can instead buy whatever they want online, get it instantly, and avoid the mess. For that reason, your media purchases are worth 75% of what you paid for them immediately after you walk out of the store. And, every year after that, they drop another 50% a year.
How much are you losing to depreciation on your books, DVD’s, and CD’s?
- How many dollars worth did you buy this past year? Multiply that times 75%.
- What’s the current value of all your books, DVD’s, and CD’s? Multiply that amount by 50%.
- Add up these two numbers to get the depreciation total of your “other media”
I really hope you like your clothes, and that you end up wearing them for a long time, because they’re basically worthless the moment you leave the store with them.
I mean think about it:
- You have a specific design style, others may not
- You wear a specific size, many others wear a different size
- What’s in style today is completely out of style two years from now. Even if it fits, no one is going to want to wear your stuff.
How much are you losing to depreciation on your clothing?
Your clothing is basically worthless just months after you buy it, but I’ll throw you a small bone here.
- If your clothing is less than one year old, consider it 90% depreciated.
- Beyond that, its value will depreciate by 75% each year.
How Much Are You Losing to Depreciation and What Should You Do About It?
So after filling out the spreadsheet, how much are you losing to depreciation this year? $1,000? $5,000? $10,000??? Did your loss make you throw up in your mouth a little? Mine did, and it’s probably small in comparison to most!
What is your depreciation amount in comparison to your income? As a rule of thumb, I’d like to see your depreciation total less than 5% of your yearly earnings. So if you earn $100,000 a year, you should target losing less than $5,000 to depreciation.
- If you’re losing less than 5% a year, then I wouldn’t sweat your number at all. Maybe your loss is $50,000 but you earn $1,000,000 a year…then you’re still fine!
- If, however, you’re losing more than 5%, then it’ll be pretty tough for you to get ahead financially.
What Can You Do If You’re Losing Too Much to Depreciation?
If you’re losing too much to depreciation (more than the advised 5%), then the first area I would look into is your car – it’s likely pretty new and is the largest part of your depreciation number. Either sell the car and buy something that’s less expensive, or commit to hang onto it for 10+ years (that way, you’ll save yourself from that ‘new car’ depreciation again).
Beyond your car, take a look at your next biggest number – maybe it’s jewelry. Ask yourself, “Is it really worth the big hit to my net worth?” Likely, the answer is no…
If you want to get ahead, stop buying things that will put you behind! If you follow through with this, you’re chance at wealth will rise exponentially.
Are you ready to take YOUR stand against depreciation?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.