The 3 Biggest Purchases of Our Financial Lives
The most significant lever on our financial wellbeing is undoubtedly increasing our income.
If you’ve ever lived check to check this likely resonates.
The second most significant lever is controlling our spending.
“More money” becomes “more problems,” when we allow our lifestyle to “creep” with new income.
Most financial pundits will focus on the second lever rather than the first, because candidly it’s easier to tell someone to stop spending money, rather than to make more of it. The latter typically isn’t as warmly received as the former.
Nonetheless if we are going to focus on the former let’s focus on the spending that matters.
The three biggest purchases of our financial lives are:
1. The house(s) we purchase
2. The car(s) we purchase
3. The degree(s) we purchase
Nailing these three is far more important than cutting Netflix or HBO Max subscriptions.
Why?
They all need to be financed with money we do not have.
The median home price in America is $400,000.
The average rate on a 30-year mortgage (today) is 7%.
Assuming a 3.5% down payment (using an FHA) a buyer will ultimately spend $925,000 on their home over its loan’s life (not including HOA, Property Tax, or maintenance) – for perspective that’s the equivalent of 60,000 Netflix subscriptions (enough Netflix to last you 5000 years).
Further, of the $925,000 the buyer spent, $540,000 went to interest on the loan… which is more than the purchase price of the house today!
Clearly if you purchase too much house, the wrong house, or get bad financing on the house the sheer size of the acquisition can push you into financial purgatory.
According to Kelley Blue Book one out of every five car purchases are luxury vehicles.
Further, one out of every five US households owns three cars or more.
Overspending on a car, who’s debt is priced like a personal loan, can have a devastating impact financially if you’re not careful.
The math:
Average price of a luxury vehicle: $75,000
Suggested down payment: $15,000
Taxes and fees: $7500
Amount financed: $67,500
Assuming you secure a 60-month loan at 9.5% interest (average), at the end of 5 years you’ll end up paying $100,000 in total, with $18,000 (more than your original down payment) going to service the debt.
What’s worse is that unlike a home purchase, which can be sold for more than it was bought, most cars lose value over time, leaving their owners with an asset worth meaningfully less than what they purchased it for.
Assuming this luxury vehicle lost 50% of its value in 5 years (which is typical), then you would have spent $100,000 to purchase something now worth $37,500 (and falling).
That’s the equivalent of cramming your savings into a brokerage account and living through 2008 again.
My last post was about college education and saving for it.
This post is about college education and paying for it – and more importantly why we pay for it.
Like any other investment a degree is an opportunity to increase your future earning potential.
It should be strictly viewed as such.
When it isn’t – you run the risk of squandering tens of thousands of dollars on something that will never pay you back.
What’s worse is that if you finance “the tens of thousands of dollars,” you’ll pay interest on an investment that will never pay you back.
And if you double down on multiple degrees that produce non-lucrative skill sets, you’re doubly harming your balance sheet and income statement.
The good news is that financing for education is often subsidized making the debt more attractive (lower interest rates and more favorable terms) – the caveat is that the debt needs to be used wisely.