Tuesday, September 7, 2010

It Doesn't Cost Me Anything to Keep It - Not True!

One reason many folks hang on to "stuff" is the premise that it is "paid for" and keeping it has no real overhead or opportunity cost.  This is, of course, not true.

Mark's Dad used to keep a lot of junk on his "farm" in Maine, and when asked why, he'd say "Well, it doesn't cost me anything to keep it!"

The more I think about that statement, the more I think it is totally wrong.  And as we get older, we are finding out a lot of things Mark's Dad said were really, really wrong.  Don't get me wrong, I love the guy, may he rest in peace.  But taking financial advice from him - bad idea.

If you have ANY DEBT whatsoever, then keeping junk you don't need is in fact costing you dearly.  And I realized this recently when I sold off two cars in my collection.

Last year, during the depths of our recession, I read a posting in a BMW forum from a guy who said, "I'm thinking of selling one of my BMWs, as I have some credit card debt I'd like to pay down.  But I checked the book value and the car isn't worth much, so I think I'll keep it."

And I have to say, I kind of felt the same way.  Why bother selling a car and taking a "loss" when you will end up using it as transportation anyway?  Well, I was wrong, dead wrong.  If you have excess "things" that are not being used or are under-utilized, and you also have debts, then you are paying monthly interest to keep those things.

First of all, let's discard the notion that you don't have any debt.  According to the Credit Card companies - and they should know - 70% of all Americans carry a balance on their credit cards every month.  Yes, this is a bad thing.  But, chances are, you have a dirty little secret in your wallet, like everyone else, and hope to "pay it off" someday, but never do.

And the reason you never do is that you have a house full of junk, and chances are, you paid for it all with a credit card.

But how does keeping junk cost money?  Well, when I sold one of my cars, I got $6500 for it.  Not a lot of money, but enough to pay off a credit card.  It was then that I realized that by keeping that car - a $6500 asset - it was costing me about $50 a month in interest payments on my credit card (at 6%, a good rate, but nevertheless, interest).

But the car is just an example.  We recently had a garage sale (and are having another one this weekend) and got rid of tons of stuff we never, ever use.  We made $500 the first weekend and have more stuff to sell next.  $500 may not sound like much, but that is $500 that pays down debt - $500 that we don't have to pay interest on.

The point is, if you are keeping some UNUSED piece of equipment, machinery, collectible, furniture, clothing, or whatever, that has some market value if you sold it at a garage sale, eBay, Craigslist, an antique dealer, or whatever, it is indeed "costing you money" if at the same time you are making interest payments on debts.  Because chances are, that item is not appreciating in value, but in fact is depreciating, while at the same time you are struggling to pay down debt.

We are cleaning out a mountain of "things" out of our house, and missing none of it.  The house hardly looks "bare" - but the cupboards, closets, desk drawers, and attic are all nice and tidy clean.

But suppose you don't have any debt?  Suppose you live debt-free in a paid-for house with no credit card balance, no car loan, no nothing?  Well, yes, the "junk" in your life is still "costing you something" in terms of depreciation.

A friend of mine inherited his Father's farm.  It came with a barn full of tractors, harvesters, and other farm equipment.  It was a great collection, but I asked him why he kept it - as he didn't intent to farm the land, and leased it out to neighboring farmers.  Again, the "it doesn't cost me anything to keep it" reasoning was employed.

But old farm equipment doesn't appreciate in value.  In fact, it depreciates pretty rapidly and after a while is worth little or nothing.  By hanging on to it, it was worth a little less every year - particularly since it sat idle, which is so bad for any machinery.  If he sold the machinery the first year he inherited it, he could have put that money in the bank or invested it and made money.

Instead, he hung onto a barn full of stuff for a decade or more, only to sell it for far less when he sold the farm to retire.

Yes, hanging on to "stuff" does cost you something.  Getting rid of equipment no longer in use is a good idea.  Getting rid of junk in your life is a good idea as well.  Hanging onto things because they "might be worth something someday" is a really, really bad idea and a good way to make yourself poor.