Driving an Expensive Car or Saving Your Money?

I would like to introduce you to two long time childhood friends, Bob and Jack, both are 25 years old and have been working in their newly founded careers for less than two years. They both got similar paying jobs out of college, the question is who is going to have a more fulfilling life? The choices they make today will have a lasting impression on their future.

Jack wants to celebrate his successful career by purchasing a $50,000 luxury vehicle, he has worked hard his whole life and he feels he deserves to buy something fancy for himself. He will do so by putting the $10,000 he has saved down and financing the $40,000 balance. Bob on the other hand has decided to buy an $7000 used car and save the rest of his earnings.

Now Jack gets to drive around town looking like a big shot, then over to all their buddies houses to show off his new purchase where everyone tells him what a sweet ride he’s got. Bob watches while Jack gets all the praise for his shiny new ride while Bob gets little praise, if any, for his older used vehicle. The fact is Jack feels like a success and wants to show off his success, at least for the first couple of years. However, let me break this scenario down…

Jack is going to spend the next five years paying off this vehicle, putting another $45,000 of payment into it with interest. Once it is paid off he will likely get another 5 years out of his vehicle until he decides it’s too old and wants to get another luxury car so he can show off once again. At this point he sells his 10 year old car for roughly $9,000.

So Jack who was a big shot for the first couple of years invested $55,000 and 10 years later is left with only $9,000. I hope Jack had fun because that was a $46,000 loss. OUCH!

Bob on the other hand took what money he could afford and purchased a modest $7000 vehicle and over the same time frame invested the same money jack had used to make his car payments. This means Bob started his investment account with $3000 and made monthly deposits of $800 for five years. Of course, in reality, Bob was smart and continued to make $800 a month payments after the 5 years was up, but I only want to compare the same years Jack was investing in his car until he decided to sell, this make the comparison fair.

We know how Jacks decision went. He got to look like the man for a couple of years, until his car that was once new is now just another older vehicle on the road. His investment of $55,000 has shrunk to just $9,000.

But what about Bob? Well fortunately Bob is doing a little bit better. Bobs initial investment of $3000 along with $800 a month at an annual 10% rate of return has netted him $66,885 after just five years. But Bob is not done yet. He is going to let that $66,885 compound for another 5 years at a 10% annual rate until Jack sells his car.

10 years after the initial purchase Jack is happy, he just sold his 10 year old car for $9000 and is heading to the bank while he thinks about what type of luxury vehicle he wants to finance next. However, what Jack does not know is that Bob’s same investment over the same time frame is now worth $109,137. Bobs decision to invest his money and by a cheaper used car has lead him to have a net worth of over $100,000 more than his friend Jack by the age of 35.

Fortunately for Bob, he kept saving and making good choices beyond this example and he is already thinking about retirement in the next few years.

Oh yeah, Bob was also able to sell his car for $900 at the end of the 10 years. Adding this to his previous total, now he can splurge and buy his next car for $10,000 cash and keep $100,000 in the bank.

So back to the original question, who is going to live the more fulfilling life? If you answered Jack, then this site is not for you. If you answered Bob, then you’re in the right place and I have a lot more examples on how you can safe for that better life.

Basics of Money Management

Money plays an important part in our every day lives and making the most of what we have will help us live a life free of financial pressures. By learning some basic rules, you can make life easier for yourself and for those who depend on you. Here are my basic rules.

Rule one. Don’t borrow money for consumable goods. What are consumable goods? They are stuff that lose value over time. Stuff you want but can live without. Examples are electronics, subscriptions to magazines, auto mobiles etc.

Rule two. Live within your means. In other words, spend less than you make. I know that may sound hard if you are on a tight budget but to just take easy credit when it is available to you is simply inviting financial disaster.

Rule three. Become financially educated. This can only be done by reading all you can about the various investment options available to you. There is really no excuse for not being kept up to date with all of the financial news because there is so much information on financial matters available on and offline.

Rule four. Diversify. A mistake that some investors have made in the past is to put all of their eggs in the one basket only to find that the company they invested their money in went bellyup. Prudent investors diversify. That is spread their money around in various companies to minimize their risk.

Rule five. Keep good company. There are people about who have bad attitudes toward financial planning and money in general and if you spend too much time with these people there attitudes can affect your thinking.

Rule six. Take responsibility for your own finances. Some people will ask others for advice just so that they have someone to blame if things do not work out for them. A financial advisor will tell you to do this or that but at the end of the day it is your money and you are the one who reaps the rewards when the markets are up or takes a hit when they are down.

Rule seven. Take a long-term view of your investments. Investing your savings is a long-term game and in order to take advantage of the gains in the markets you have to take a hit occasionally which means not panicking when the markets are going down.

Rule eight. Keep the big picture in mind. In other words have a target or goal in mind. Are you saving for a house deposit or your retirement?

Planning for Perception or Preference?

It’s hard to believe, but the holiday season is almost upon us. The leaves have dropped along with the temperature and the dreaded snowfall is imminent. It’s a time where you crave carbs, curl up in sweaters and begin the hibernation process.

Unfortunately, we are not bears and are not afforded the luxury of shutting ourselves down for a few months. At a time where all you want to do is snuggle under a blanket on the couch and binge watch all the shows you missed while doing yardwork, the demands of family, friends and work dramatically increase.

Tis the season of holiday shopping, parties and entertaining. Tis the season to exert extreme drain on our energy, wardrobe and pocketbook. Tis the season to spend.

Before you start making your list and checking it twice, it may be time to ask yourself why. Here’s a few scenarios:

  1. You’re invited to a work holiday party. Now the panic begins. What do you wear? Your first instinct will be to run out and buy a new outfit, shoes and accessories. Stop, ask why? First look through your closet, it’s very likely you have a classic outfit which would look fantastic. If that is the case, why would you buy a new one? Who are you looking to impress and do you need to?
  2. You’re hosting a soiree. If you’ve ever hosted an event at your house, you have an idea of how much it costs in both time and money. You run around cleaning your house until it’s spic and span so no one will know what it normally looks like. If these are the people you’re inviting into your home, your sanctuary, do you think they will care if there’s a little dust on the top of the mirror? If they do, perhaps you need to ask why you invite them into your home. Now comes the cost of all the party decorations, accessories, food and drink. When you add that all up, maybe it’s time to suggest meeting at a restaurant/lounge instead.
  3. You need to complete your holiday shopping. We’ve talked about this before and how easy it is to blow your budget even on a small list of people to buy for. Sit down with your list, assign an amount to each person. Then ask, why am I buying for them or why am I spending so much?

In a world where social media is the standard by which people exist, it’s easy to get sucked into the spend. The hard part is identifying if you’re doing it because you really want to or because you want to impress someone. Psychological studies have shown how much impact a like or a share affects our psyche and confidence. Why is that worth the stress and strain on your wallet?