Last week, we started to declutter our home and invited you to join along with us. If you missed it, it is not too late to join us, just sign up below. If you want another perspective on decluttering, Mrs. Frugalwoods just posted a great article that is worth a read.
While it is very easy to say you are going to declutter your entire house, it is, many times, much more difficult to actually do it. This is especially true when you realize how much money you, or someone you love, has spent on all of the things that are in your house. How do you get rid of that ugly polka dotted sweater someone bought you? Or can you bear to give away a clock that you have no room or use for, but someone bought you because it matched the rest of your decor?
It is always nice to receive gifts. The feeling of warmth that someone took the time to think of something you might like and then spend their hard-earned cash on it can just melt your heart sometimes. But those feelings must sometimes come second to getting your house and life back in order. You cannot keep everything someone has ever given you over your lifetime. You would quickly become overrun with stuff (Have you ever seen an episode of Hoarders?).
That does not include the things you have bought for yourself along the way that have little to no utility now. But they are so hard to get rid of because you know how much you spent on it and getting rid of it can feel like you are wasting money. And wasting money is bad if you are trying to be frugal, right?
Well, it depends on how you are ‘wasting’ it.
What are sunk costs?
A sunk cost is the money you have already spent on an item that you will not get back. It is in the past and cannot be attributed to the current value of an item. Yes, you may have spent way too much money on that new TV you really didn’t need, but you cannot go back in time and change it. You can regret the purchase forever (though I wouldn’t recommend it) because you had a perfectly good TV, but you will, ultimately, never get back the money you spent on it.
Before you started becoming frugal and spending less on stuff, you probably bought stuff you didn’t need, just like we did. I have a weakness for craft supplies, the Dollar Tree, and whatever my current obsession is (right now it is gardening and raising worms, for gardening). If I find something on sale that has to do with my obsessions, it is hard for me to step back and not buy it. I am better at it now than I was. Before I started watching all of my dollars, I knew I had the money, so I would buy it. I am still a work in progress.
So now, I have lots of stuff (I’m talking to you, craft supplies) that I have never even touched because I just didn’t get around to it. And it is impossible to downsize this when I think about all of the money I have spent on these items over the years. And many of them were given to me as gifts that I used maybe once or twice before getting busy with something else.
Everything has a sunk cost. Everything was purchased by someone with some amount of money at some point in time. To truly declutter and get some of the excess out of our lives, we have to overcome the thought of those sunk costs and step beyond them. I have to get past thinking of the sunk costs of these items and think about how much it costs me to keep these items around.
Large sunk costs
So far, all of the examples have been on fairly trivial items. But what happens when this example is expanded to, say, the size of a car?
Having a car sitting in the yard that is constantly in a state of rest while the owner decides that one day he will work on it seems to be a rite of passage in the South. Who knows, maybe this is an all-over thing, not just in the South. But I see it everywhere.
I know many people who have cars that they have parked in their yards that they are going to work on one day. Many of the reasons I have heard for keeping those cars around are the fact that they have already put a good bit of money into the car or that once they do sink money in the car, it will actually be worth something.
But year after year, the cars are not touched and are rusting out and quickly becoming of no value at all. So why not, instead of ‘one day’ working on the car, they sell it now? It would give them some cash in hand and would also free up valuable space in the yard. What if they can sell the car before it rusts and get some real cold hard cash to spend on something else they value more. Or, if they have not yet reached their FIRE Figure, they can put it toward their retirement.
Overcoming the cost aspect
As you are decluttering your house, how do you get rid of stuff for which you paid money? How do you give away something for which you spent your hard-earned cash, especially if it was a lot of cash?
We have to rework our brain to think about our possessions in their current value instead of the previous or future value. The current value of a book is however much you can get for it if you sold it today. The previous value is what you paid for the book.
If you have no definite plans to fix that old toaster and sell it, just get rid of it. It is taking up space in your kitchen that could be used for any number of things.
If that $150 jacket you bought is out of style and doesn’t fit you anymore, sell it or donate it and let someone else use it. If you just store it in your closet forever only because you paid $150 for it, it provides you no utility and just gets in the way.
If you can get over the sunk cost for the item, you can create wealth for yourself by selling the item for a small sum or at least clear out some space in your home or storage unit, which will save you money in the long run.
Can you be frugal while still ignoring sunk costs?
The simple answer is YES! If you are keeping an old bike with no immediate plan to fix it, what good is it to you? Yes, it may be more frugal to fix the bike than buy a new one, but if you never fix it, it isn’t actually saving you any money. (Richard is going to kill me when he sees this because I have a bike in the garage now I have been planning to fix for several years now! I told you I was a work in progress!)
Many times, people who want to start becoming frugal see any opportunity to get something used or free as a wonderful opportunity. While it is great to get free stuff, that is only actually relevant if you need the item. You definitely don’t want a free item to end up costing you money by storing it to one day use or to spend more money trying to fix it than a new item costs.
Getting yourself in a mindset to ignore sunk costs is difficult, but can be very beneficial in the long run. When trying to get rid of stuff, you have to ignore the original value of the item and instead see if it serves any utility to you now. If you have no use for it, it is better to donate it to someone in need or sell it for a few dollars than to constantly complain that you can’t get out of it the amount of money you put into it.
As with any ‘rule’, there is an exception. If you truly get joy from working on cars and actively do so, there is no reason to sell the car in the yard for a loss. But you have to be actively working on it and making it better. At the end, when the car is working well, you can either use the car or sell it. This could save you money in the long run or, at the very least, provide you with enjoyment while you work on it. You do not have to lead a life with no possessions because you sold them all. You do, however, have to live a life that you enjoy while working toward your goals of being Financially Independent.