Currently, over at the 7 Millionaires … In Training! ‘grand experiment’ we have been looking at the 7MIT’s cars and their attitudes, thereof.
I introduced them to the 5% Cars + Other Possessions Rule, which Jeff seems to have forgotten covers all of your possessions outside of your home … not just your car:
It seems like all you’d need to do is wait a bit and eventually your car will depreciate enough to be under 5%.
Does anyone really count their cars as part of their net worth? I view them more as a disposable item and not something that I try and calculate my net worth with.
But, Jeff does touch on an interesting ‘quirk’ of cars and other possessions that is different to what generally happens with houses and investments: they go DOWN in value over time.
This depreciation is something that we can take advantage of …
… you see, we can use the fact that our Net Worth should be increasing – while these other items are probably decreasing – to allow us to go shopping every few years or so!
[AJC: But, don’t forget to always pay CASH!]
Think about it, if 75% of our Net Worth is in investments (this is called your Investment Net Worth … it does NOT include your house, cars, and other cr*p that you may have lying around) and 20% is in your house and 5% in your cars/possessions, then you may have a Net Worth IQ asset column that looks like this:
Investments: $75,000 (75%)
House Equity: $20,000 (20%)
Cars: $2,500 (2.5%)
Other Possessions: $2,500 (2.5%)
But, in 3 years time – assuming a ‘normal’ market (and, who can really assume anything these days?!), it might look something like this:
Investments: $105,000 (80%)
House Equity: $25,000 (18%)
Cars: $1,250 (1%)
Other Possessions: $1,250 (1%)
Which allows you a number of options:
a) Pay down some of your mortgage (up to $2,500) to bring your house back to the maximum equity that these rules ‘allow’, or
b) Buy a newer car or some more cr*p (up to $2,500) to reward yourself for your good work, or
c) Decide to become rich(er), quick(er) by realizing that the rules were designed to have a MINIMUM of 75% of your Net Worth in investments … but, there’s nothing wrong with investing more 🙂
d) Some sensible combination of any/all of the above
I like (d) … to be totally honest, I don’t go for the overly-frugal nonsense: once I reach a financial milestone, I see nothing wrong with allowing myself a little enjoyment … that’s why I’m sitting back on my hammock right now with a Pina Colada and enjoying the Aussie sunshine ….
… regardless of how YOU choose to look at it, when you have a set of guidelines that you can follow, doesn’t it make it easy to at least see what the choices are?
I am not sure if this is relevant but one of my past managers said that people should be buying a car that is 10% of their annual income.
Ever heard of such a thing?
Interesting post Adrian,
One of the trends of society is that DEBT lenders have been gradually inching their way into every different sort of market while consumers have been buying on credit and running in front of themselves. It would be a very interesting study to see how many NEW cars are bought for CASH and how many are bought on credit. In fact with the vehicle market many people have started to forget the value of the car and only remember the monthly repayment.
The thought of paying cash for a vehicle by Gen X and Gen Y is now so counter cultural it might even seem absurd!
@ Andee – If that’s truly the case (“The thought of paying cash for a vehicle by Gen X and Gen Y is now so counter cultural it might even seem absurd!”) then do we have a BIG job in front of us! It seems to me, though, that a large readership of personal finance blogs is from the Gen X/Y groups … hopefully, they will be the ‘leaders’ who spread the word.