The term “sunk cost” basically means evaluating the cost of something going forward and whether what you already have or have already done will change in value if you have to make a financial change. It’s an interesting concept to know about and can be very helpful for both business and personal decisions. Let’s take a look at it.
a lot of sunk cost items here
Let’s say you have a business and it’s time to do upgrades in office supplies. You already have a lot of office furniture, and you’re thinking about buying newer items because they offer better efficiency. But you’re torn because your current furniture still looks pretty good, and in your mind you think you’d be wasting your money either buying something new or getting rid of something old that your mind still sees as valuable.
In this example, the concept of sunk cost comes into play because your current furniture is obsolete, no money will go into trying to upgrade it, and your needs have changed since you bought it. There’s absolutely no cost to your business if you get rid of it; you got value out of it but now you can make room for something that better fits your needs.
You can look at furniture in your home the same way. People’s tastes change and sometimes we want something new. Should it matter if you bought the furniture only two years ago? Does it have any value?
In both of these instances, cost should be taken out of the equation. What needs to remain is whether or not you have the resources to follow through on either of these purchases. In the first example, you need better equipment for business purposes; in the second, you don’t like the furniture you bought two years ago. It comes down to what fits your needs; don’t feel guilty if you have the money to spend, because you got what you needed out of what you’re looking to change.
Let’s look at buying a new car the same way. You already have a car that’s paid off, which is great. However, the warranty of over and you’re continually paying for repairs. You paid for your last one a month ago that cost you $1,500; that one hurt a bit.
You come across a newer car that’s in great condition. It’ll cost more than the repair you just paid for, but your older car keeps having things fail, which means there’s more money that comes out of your pocket. Comparing the $1,500 to a new car that might cost you $20,000 is a normal thing to consider.
A better consideration, if you can afford it, is buying a newer car that probably won’t need much service than an oil change here and there. You’ll have a known monthly payment as opposed to another problem you have to pay for on your older car, and unfortunately most people don’t have money put away for those types of emergencies.
In the age of 100,000 mile warranties, you can look at your older car as a sunk cost, even if you recently paid for repairs, because it’s only going to get older and truthfully there’s no real value in keeping it any longer. Once again, this works if you can make the payments on a new car, but it’ll be consistent, which makes it easier to set up a monthly plan to handle the finances.
In the cases of furniture and cars, there’s nothing recoverable as far as income in concerned, there’s no real loss of value, and you’re getting a needed upgrade. Repairing or renovating either item won’t bring more value to those items. Emotionally it might be difficult to let go of; logically, thinking about the sunk cost process is a better way to go.
This way of thinking can help if you have a lot of clutter around either your house or office and want to eliminate a lot of it. It’s tough to let go of emotional attachments, but if it’s been sitting in the basement for years and you haven’t needed it, and it’s something big, holding onto it won’t help you in the long run. Tough choices have to be made mentally, but reducing the clutter based on thinking about sunk cost might help you push through it… and truthfully, if you have a lot of clutter, you probably won’t remember almost any of it when it’s gone. 🙂
Just something to think about when you believe it might be time to make some changes. Also, remember that if you buy something new for business, you get to write off the expenses!
