(Bloomberg Opinion) -- Count me out of the “Financial Independence/Retire Early” movement. I can’t imagine retiring in your 30s or 40s brings happiness or life satisfaction. Worse, the claims of the FIRE proponents do not work well for helping the average person manage their finances. Instead, they tend to be grossly exaggerated or oversimplified.
As such, I am not a fan of bold pronunciations about spending, like: Never buy a boat! Stop drinking lattes! Don’t buy a new car! They seem designed more to attract attention than impart wisdom. I prefer rational guidelines that help consumers make better spending decisions. Overbroad rules of thumb do not serve anyone’s interest, and are often wrong except at the extremes.
Consider this recent Twitter discussion about automobiles, which is one of my favorite subjects:
“Spending $40,000 on a car seems like the kind of thing to me that, intuitively, you do when you have like a couple million in wealth and make $400,000 a year. But absolutely normal people do it all the time! Blows me away.”
No, you do not need to be a millionaire or make almost half a million dollars per year to purchase a new mid-sized sedan or small SUV. The position above, hyperbolic as it is, does touch upon ideas that I feel are important: what makes people happy and how people often make financial decisions unconsciously.
Let’s use an automobile purchase as an example. Start with the math on a new car. These days, a new car will cost about $179 per month for each $10,000 financed. In the $40,000 example above, with a $5,000 down payment (though I prefer 15% to 20% down ), at current rates (2.89% annual percentage rate for 60 months), you are financing $35,000, or $627 per month.
What about leasing? The math here only makes sense if you are making payments with pre-tax dollars, such as with legitimate business leases. Otherwise, leasing is pricey. And, new car leases – typically 36 months – purchase the most expensive years and miles of car ownership.
With that in mind, consider this as a better approach to big-ticket purchase decisions:
1. Budget. It is surprising how often people do not operate with a written monthly budget. Consumers need to understand their own balance sheets to be able to make intelligent financial decisions.
Nothing is more basic than putting your financial life on a spreadsheet, including income and monthly expenses. Keeping track of annual costs such as travel or vacation, and the occasional irregular spending on items such as weddings or home repairs is a smart idea.
You need to know what you can afford before you can even get to the question of whether you should you buy it or not. If you do not know what you can afford, how can you possibly make an intelligent financial decision? You need a budget if you want to stay within our previously discussed Rule No. 1 of personal finance: “Spend less than you earn.” This is as true for those shopping for a Hyundai as it is for a Bentley.
2. Prioritize: Every purchase made is a tradeoff against some other use of that capital. If you spend money on this, you have less cash available to spend on that. This is especially true for homes, cars or any big-ticket item.
Other than the Jeff Bezoses of the world, we all have finite budgets. Figure out your priorities and decide what is important to you and your family and what matters less. And there are tradeoffs even within purchases. Do you want speed or efficiency? Style, quality, room, utility, comfort, or safety? All vehicles are a blend of these qualities, with different emphasis depending upon the audience the manufacture is targeting.
3. Don’t engage in mindless consumerism: Beyond the simple question of what you can afford is the underlying reason why you are making purchases. There is much to be said for having an awareness of what you consume and why. I am not a finger-wagging scold telling people NOT to buy things, but I want those decisions to be purposeful, bringing life satisfaction and happiness.
If you really want a manual stick shift, high horsepower convertible because it puts a grin on your face every time you drive it, that’s fine. But if you are purchasing an expensive, unreliable luxury British SUV because your neighbors did, that raises problematic issues. Consumerism of this sort has gotten so bad my colleague Ben Carlson recently wondered if expensive and (for many, unnecessary) pickup trucks are partially responsible for the pending retirement crisis.
4. Needs: Do you need a new car? Today’s automobiles are extremely well made, reliable and long-lasting. Used cars built in the past five to 10 years should deliver 100,000 trouble free miles. Brands with reputations for reliability can easily double that amount. While automobiles made today have safety features not available 10 years ago, the 2010 model cars are much safer than the cars from the 1990s.
5. Understand what will – and will not – bring you joy. We know a lot about what makes people happy and brings life satisfaction. Experiences beat consumer goods, and creating memories is better than accumulating stuff.
But we also know we are very bad at predicting what will actually make us happy. I can say without reservation that fast, beautiful cars bring me joy. I have owned lots of them, and each one has brought me pleasure until they were eventually replaced with something faster and prettier (but not necessarily newer). But I’m a car guy, and what makes me happy may not make you happy.
Find out what you really want to do with your time and money, what brings you life satisfaction. And whatever you do, stop making purchases to show off to neighbors.
I often disagree about economic issues with Adam Ozimek, author of the tweet and the Chief Economist at Upwork. These usually manifest as respectful offline debates that end up more as intellectually nuanced back and forth than ideological brawls. As often as we disagree, we usually find some common ground on which we share similar perspectives.
The pushback to this argument is that with rates at historic lows, you are better off financing the most you can.This runs into other issues, such as the risk of taking on too much leverageand spending beyond your means. Assuming a new car replaces an old one, you want some equity to roll to your next down payment. About $5,000 down on a new car purchase every 7-10 years seems rather reasonable.
I used the published rates from PenFed, who financed a recent car purchase of mine. They are one of the few institutions that will finance collectible cars more than fiveyears old.
Of course, billionaires have finite budgets also, and there are only so many $500 million paintings anyone can buy. But for spending on things like homes or cars, they effectively have an unlimited budget. You - and I -probably do not.
I always have had a “weekend” car that I drove for a few years and then traded up to something else. Find the sweet spot between depreciation and used car reliability and you can spend an almost rational amount of dollars on these. If you buy them right, you can sell them a few years later for about what you paid for them (or more). A few examples of things that recently caught my eye include a 2014 Porsche 911 Turbo AWD that was $165,780 new but recently sold for less than half of that at $81,000; or a2016 Bentley Continental GT V8-S with a 2016 MSRP of $237,625 which sold for $82,500, a 65.3% depreciation. (I did not buy either, but that GT was very tempting, if only I was ready to let go of the car it would replace).
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”
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