Socially acceptable – buy car vs buy shares
There are many hidden rules about how we should and should not behave. If we do not follow the norm, most people will think that we are different. We like to follow the current so as not to stick out too much.
What is okay to do?
How do you know if something you plan to do is okay? Often we ask friends and family, consult the bank, read online. When we do that it means that we will follow the norm and do “like everyone else”.
Doing “like everyone else” may be good in some respects but sometimes you have to be strong and dare to go against the flow to be successful. Both personally and financially. I was at a lecture several years ago where an exciting example was presented that I wanted to share below.
Buy car vs buy shares
Incidentally station scenario
Lisa is at work and in the morning, she tells us that they have ordered a new Volvo V90 (the price is around USD 400,000). How are the reactions among colleagues? Thoughts: People say “what fun, what engine, what color”. Lisa says that as house prices have risen, they could lend the house to finance the purchase instead of taking an expensive car loan without collateral which everyone thinks sounds great.
Lisa is at work and in the morning, she tells me that they have bought Volvo shares for USD 400,000. How are the reactions among colleagues? Thoughts: People ask if she is really wise? It is very high risk to buy shares, never know if they will go up or down. What if you lose the money? Lisa tells us that as house prices have increased, they can mortgage the house to finance the purchase of the shares. What do people say ?!
Yes what do you think of the above scenario?
When I heard it the first time, I understand very well that many will react strongly to buying the shares because it is not “mainstream”, especially if Lisa mortgaged the house. But buying a new car is something that most people do from time to time and it follows the norm of what is “normal” and is therefore accepted by colleagues even though it is a financially bad deal.
So what’s best?
You may have understood where I want to come up with this example, but let’s just count on it for the sake of pleasure.
Lending the house USD 400,000 with 1.5% interest (USD 6,000 / year, USD 4,000 after the interest deduction)
After 10 years you can sell the car for USD 90,000 (block increase of 10 year old Volvo V70 D5 which has gone about 15,000 miles)
Summary after 10 years
The car: Sells the car for USD 90,000 (lost USD 310,000) and has paid USD 40,000 interest = Net loss of USD 350,000
Shares: USD 400,000 with 10% return minus USD 40,000 in interest expenses (USD 4,000 per year for 10 years) yields USD 1 million = Net profit USD 600,000
The net difference between the two alternatives is thus almost one million. What if you bought the new car just to look cool, or to fit in the bunch of friends? The alternative is to have a million in your account. With that money you could continue to build your money machine or buy a cooler car than a Volvo if it now interests you!