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One Way to Think About Purchases Is in Ratios and Percentages

| October 15, 2019
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We generally don't tell clients how much they're up or down in raw dollars.  We talk about percentages.

Percentages tell you a lot more about the story.  Recently, someone said they didn't want to hire a financial advisor that didn't drive an expensive car.

In their “money script” of how the world works, an expensive car means you know what you're doing, and you must be a desirable person to hire. 

This assertion first struck me as lacking awareness and wrong.

But it got me thinking about the ratios of life and when things are in balance and when they're not. 

For example, I recently helped a young person that is making a pretty good living figure out that they're spending over 15% of their take-home pay on their car.  Now, obviously, if they just bought a new vehicle and are getting started in life, this might be an okay ratio.  But they are making good money, still don’t own a home of their own, and have a laundry list of things that are more important to them. 

Then I started to think about what's the ratio of my vehicle to my income, and what's the ratio of my vehicle to my net worth? 

Do those numbers make me proud, or ashamed? 

You might know that I take a certain amount of pride in driving a reliable beater.  While I understand that some people put more value on such things, I would urge you think about the value of your home versus your car and if those ratios are in line. 

When I see a $200,000 car, which now seems almost common, I hope the owner (or renter) has a net worth of $5m++, but they probably don’t. 

I'll never forget visiting my friend in Southern California when they were going through graduate school and the $3,000 apartment that they were renting. 

With all the newish Mercedes, Jaguars, Porsches, and BMWs lined up outside, while not a single one of these people even own their own house.  Most of these people were spending $60,000+ on vehicles.  It just didn’t make sense to me.  Although, in California, the dealers like to say, “around here you have to love what you drive” because you are stuck in gridlock traffic so often.

Take a little comfort in knowing that most luxury cars are leased these days.  My friend even caught someone renting a $300,000 car recently and pretending it was his simply for empty social status.  It was like the old commercial where the guy rents a Cadillac to go to his high school reunion to pretend he was more successful. 

I know it’s hard to believe, but people regularly do this stuff to varying degrees; don’t get caught up in it. 

What are other ratios can you think of see if your financial house is in balance or perhaps a little out of whack and needing reframing?

If you find yourself wanting to keep up with the Joneses on something, turn the conversation around. 

Ask them what ratio is that car worth vs. their income, or worse yet is it a lease?*

How many times their income is their house?  Is it five times?  Ten times?  Does it make sense?

How many hours does it take you to pay for that new pair of sunglasses?

How many times can you get your kid to wear their Halloween costume to get the most bang for your buck? 

Do you remember the old wedding commercial  “How two months of salary can last forever?”  That’s the same method, thinking in ratios and percentages!

I'll never forget moving to Texas and seeing $80,000 boats parked in front of $150,000 houses. 

Some of these ratios around me blow my mind.

But there is hope, Warren Buffett, one of the wealthiest people in the world recently replaced his 2006 Cadillac after his daughter said it was embarrasing.  He replaced it with a $45,000 Cadillac in 2014.  At that ratio, he could buy about 1.8 million of these cars over and still have money for groceries.  

Thanks for taking a look, and I hope you, too, will be okay!

Tom

 

*disclaimer, leasing can be good for cash flow, and business write-offs, and for people that put value in always driving a newish car

 

 

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

 

 

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