I recently read a guest post over at Get Rich Slowly from William over at DropDeadMoney. Feel free to click on the link to read the entire post along with the many comments. I started to comment, but then realized I how much I had to say and decided to write a post about it.
To summarize, William says we can either choose to be an investor, which is a person that invests their money and those investments produce an income on which you live, or you chose to be a debtor, which is a person that owes money to others and therefore has to work to pay the bills. In essence, an investor can choose to work whereas a debtor has to work.
The great example used is the typical debtor with a car payment. This person will make payments for a period of time, say five years, and once the car is paid off, has no idea what to do with the money now that they no longer have a car payment. An investor in this situation will invest this money so that it compounds upon itself and grows to be something that he can live off of in the future. A debtor on the other hand will not know what to do with this “extra” income and as a result, he goes out and buys another car, saddling him with payments again for five more years. This cycle will then repeat itself in another five years.
While I think that the post by William is excellent, I want to expand on it just a bit. I feel that the majority of people out there are debtors. As a result, this mentality skews itself in advice people give. Take for instance a situation I am in. I have two cars. One just died on me and I am getting rid of it. The other one is a sports car and gets poor gas mileage (and requires premium gas), has very limited storage space, just crossed 100,000 miles and has a high insurance premium because many young drivers like the car and they are risky to insure.
While the car is safe; it has all-wheel drive and good ratings in crash tests, I plan on starting a family in the near future and want a car that has a little more room and gets better gas mileage (read: more practical). The problem is that the cars I am looking at all cost around $30,000.
This price might not seem like much to some, but to me, it is a lot. Many might look at the $30,000 as buying reliable transportation and that a monthly payment of $400 is the price you have to pay. I on the hand, look at what I could do with $30,000 if I invested it. Of course if I were to buy a $20,000 car I could invest the difference of $10,000.
It all boils down to this: the majority of people live their lives with the goal to retire, hopefully at 65 or somewhere around there. I on the other hand want to retire as soon as possible. I view those that want to retire at or around 65 as those that would buy the $30,000 and pay it off over five years. But what do those people do that want to retire as soon as possible do? (Note that I am not saying one decision is right and the other is wrong, it is just personal preference as to what you want to do.)
Taking out a $30,000 loan for a car and paying it off as quickly as possible does no good – I’m still shelling out $30,000. Does it make sense to spend $30,000 for a car that I plan on keeping for 10 years? Or would I be better off just buying a reliable used car for $20,000? (Note that I really – really like the $30,000 car haha!!)
I’m just torn. I like to balance my life – live now while still saving for the future. But I am willing to forego some luxuries now if it gets me to the future that I desire much quicker.
I apologize if I am jumping around with this post or if it doesn’t completely make sense. I seem to be having a hard time getting what I am thinking into written form. I guess what I am looking for are your thoughts and comments. If you didn’t want to work until 65 – say 50 instead – and you needed a new car, what would you do? Buy the one you really want even if it seems like a lot of money, or search for a lower cost one so that you could invest the difference? I guess the key here is actually investing the difference. If you buy a $20,000 car instead of a $30,000 car and use the $10,000 for a vacation, it’s the same thing, you are still spending $30,000.
So what are your thoughts? What would you do?