It is beneficial to maintain a ‘net worth mindset’. What I mean is that you should consider how each purchase and every item you own impacts your net worth. When you purchase an item, think to yourself: at what rate will the item depreciate? What recurring costs will this item have? What is the opportunity cost of this item? What consequence will this item have on my net worth? Every item you purchase will affect your net worth and it is therefore important to understand the immediate impact, and future impact. Your goal should be to maximize your net worth, which means avoiding the things that will reduce your net worth. By considering the following categories when purchasing items, you can guide your spending to minimize loss to your net worth. 

Depreciation 

Most items you purchase will depreciate over time. A $2,000 laptop will be worth $500 in 3 years. A $40,000 car will be worth $30,000 within 1 year. A $900 vacuum cleaner will be worth $300 in 2 years. The depreciation – the amount you paid minus the amount you can sell the item for – is a direct loss to your Net Worth. I try to buy things that minimize the negative impact on my net worth by purchasing used items instead of new ones when possible, and buying things that are good quality and thus more likely to retain their value. 

Recurring Costs 

There are often recurring costs with the things we buy. A home has recurring maintenance, utilities, and property tax costs. A car has maintenance, insurance, and registration costs. A wool coat needs to be dry-cleaned twice yearly. A few years ago, we received a Nespresso coffee maker as a gift. We both enjoy coffee, so we began to use this machine for all our at-home coffee brewing. The single-use pods cost $0.90 each, so my wife and I now spend around $50/month, compared to the $10/month we used to spend on regular ground coffee. This is an example of an increased recurring cost related to the acquisition of a product. New hobbies can also have many unplanned financial strings attached. You may decide to begin golfing and purchase a bag and clubs for $1,500. As you begin to golf more, you purchase accessories like shoes, gloves, and towels for $400. Each time you golf, it is $80 for the green fees, $10 for the balls and tees, and $40 for lunch and refreshments. In this case, the cost to start is $1,900, and the recurring cost is $130 per round of golf. 

Opportunity Cost 

For each item I purchase, I consider the Opportunity Cost – the financial benefit foregone by purchasing the item. Compare what return you would have received if you invested the money rather than spending it on the item. For example, if I invest $10,000 at an 8% annual rate of return rather than choosing to purchase a $10,000 Motorcycle, I will receive $800 after the first year. In 25 years, the invested $10,000 will be over $68,000, but the motorcycle will be worthless. Put another way, assuming you are 25 years from retirement, every $1 you waste today instead of investing is costing your future self $6 in retirement.