Do You Want or Need a Cadillac?
When I was young, there was a house I would notice when riding to my Grandmama’s house. It was an old wooden structure house, which needed a new paint job and even had cracks in the wood so I could see inside the house. But what stood out, was the brand new four-door Cadillac sitting in front of the house. The house and the land were NOT worth the cost of that car! I could not understand why anyone would pay for this pretty car and live in such a horrible house. Years later, my Mom explained most people who knew this man, never saw where he lived, but they did see his car. His image was more important than fixing his house.
Sometimes I am asked by young people, with good jobs (paying ~$50,000 or more), if they should buy a new Lexus or a Mercedes. When asked this question, I often think of that new Cadillac. So let’s analyze the cost of a new Lexus or Mercedes, should you spend $50,000 on a car, when your income is about the same amount as the car? If you finance the car for six years and pay ~6% interest, your monthly payment will be $829/month.
But, what if, instead you purchased a used car, for $25,000. Your new payments are around $414/month, for six years,@ 6% interest.
If you then turn around and invest your monthly savings ($828.64-$414.32) $414.32/month, in Vanguard S&P 500 ETF, Index fund, for six-year, assuming an 8% return, you end up with ~$38,382 investment dollars.
In the 2nd option, you end up with a nice, reliable, car and $38,382, investment dollars. The choice is yours. When you are looking at that new Louis Vuitton bag, an expensive coat, new car, etc, take a day or two and decide do I really need this. If you decide this is a want, not a need, would you be better off, investing the money? Another question to ask, would not be spending this money, help me achieve my first $1 million?
One final note- Jeff Bezos, CEO of Amazon, and the richest man in the world, is worth $109 BILLION and drives a Honda Accord. His reason, he says, “it’s a nice car”.
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