One of our advisors was chatting to a client the other day.
The question came up.
“I want to spend $50,000 on a new car. Is this a wise move?”
The client was a young professional man in his early 30’s. Engaged to be married, no family and still plenty of good time on his side.
Did he need to spend that much on a car? Probably not.
Did he want to? He sure did!
Over and over again, we are seeing people psychologically falling in love with a lifestyle. An image to maintain. Keeping up with the friends and neighbours.
Sure, someone might easily be able to talk themselves into buying a new car. “I work hard, earn good money. I can afford this……”
But do they fully understand all the financial implications?
The decision on buying that car is based on how it makes you feel without any consequence on what that means financially over the long term.
Let’s model some numbers around this:
What is the financial consequence of doing this? What else can you do with this $770 per month?
You need to look at the opportunity cost.
That same cash flow of $770 per month has the potential to support a fund a home loan of around $200,000 (5% interest on an interest only loan OR $143,000 on principal and interest loan over a 30 year time frame at same interest rate). This could be an investment property returning rental income to you further adding to your potential borrowing power.
So next time you are thinking about a big purchase decision, try to dig around and fully understand what the consequences are and what it really means in the bigger picture of your overall finances?
We aren’t saying don’t buy the car, and we also aren’t saying to buy a house instead.
We are just challenging you to think about the future investment potential and how this fits with your longer term goals. More importantly, we need to understand the (potential) true value of our cashflow.
In a world where interest rates are so low. The ability to access finance to purchase items like vehicles has never been so easy. Sure it doesn’t cost that much to get a car. But it doesn’t cost that much more to get a house either.
Which asset do you think is a better investment?
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