How to Hedge Against Inflation, Save the Environment, and Save Money (all at the same time!)
By: BJ Lawson
One of the most influential books for our family was Dave Ramsey’s Total Money Makeover. Dave slays the myths about consumer credit and our debt-strapped society, and after reading this book several years ago, we put ourselves on a trajectory to live debt-free.
Dave’s pointed analysis of our personal finances accelerated my broader interest in the financial system as a whole. After looking at the reality of debt, credit, and inflation both at the micro and macro level, I love finding real-world examples that bring things together in a cohesive way — such as today’s furniture shopping at the local flea market.
We needed a new bookcase. When evaluating the market comparables, we found the following:
New (Target.com): Four-shelf imported bookshelf made of MDF (particleboard) with cherry laminate finish. Price - $140.
New (Ethan Allen): Imported hardwood bookshelf atop hardwood hutch. Utility and appearance similar to flea market model below. Price - $1600.
Used (Flea Market): 20th-century American-made hardwood curio cabinet with three-door glass cabinet, atop three door hardwood hutch with three drawers. Lots of shelves, finish in great condition. Price - $500.
Economically, what is the best purchase? If you’re interested in “saving money”, you could spend $140 on the plywood/laminate bookshelf. But after ten years (if it makes it that long), the particleboard/laminate bookshelf will be in the trash heap or recycling bin. You traded $140 in purchasing power for something to hold your books, but over time, that purchasing power (from your perspective) will disappear into the dustbin of history. The money is literally “spent”.
The new Ethan Allen furniture is over 10x as expensive as the Target solution, and although it still holds your books, it is solid wood and built to hand down to your children. However, it’s made overseas using lumber that may have been non-sustainably stripped from a hardwood forests. It also took a lot of fossil fuels to get the thing to your door. But environmental concerns aside, you’re being asked to trade $1,600 in purchasing power for hardwood furniture that will hold your books.
The flea market solution is starting to look even better. It’s a nice piece of furniture that was built to last. It’s been well treated, and when you purchase it from the local antique dealer, your purchasing power is transferred to someone who is in business for himself in your same community. But the best part is that you’re only being asked to trade $500 (instead of $1,600) for the same functionality.
So how is a well-built used dresser a hedge against inflation? Well, thinking ahead ten years, have you really lost anything? Has your money been “spent”? If you need to sell this bookcase in ten years, someone will be willing to pay you whatever a well-built bookcase is worth at that time. If you damage it, you may take a loss. But if you are careful and take care of it, the value of that item to a new owner should be about the same as it is now. So you’ve just traded $500 in cash for an asset that, over time, should hold its value pretty well. Additionally, in ten years, the new Ethan Allen bookcase will likely be valued similarly to the flea market one — after all, they’re both used bookcases that look about the same and provide the same value to the owner. So why spend $1600 now, when your likely “exit” should you choose to sell it in ten years might be closer to the inflation-adjusted equivalent of today’s $500?
Finally, if you’re at all tempted to buy the Target bookshelf that will disintegrate in ten years, then keep in mind what you’re doing. You are literally giving away your purchasing power, and getting nothing but some help holding books for a limited amount of time in return. You’re effectively “paying rent”, and not actually buying anything of lasting value. Not only are you not hedging against inflation, but you are becoming immediately poorer as a result of your spending habits.
So there you have it. You can recycle, buy American (again!), save money, and hedge against inflation by doing something as simple as purchasing nice used furniture at the flea market or local antique store. Oh, and one more thing — Ethan Allen will tempt you to finance that new $1,600 bookshelf… thus paying even MORE money for the privilege of taking a greater loss later. If you think that’s a good idea, you REALLY need to read Dave Ramsey’s book!
August 20th, 2007 at 1:10 pm
I think your realization about the flea market solution of buying high quality used furniture correlates with the research done in the book, The Millionaire Next Door. Stanley and Danko found that millionaires generally don’t buy cheap furniture. They certainly skimp in many areas but furniture didn’t seem to be one of those areas.