Canadians 'drowning in debt': 47% will borrow to cover costs, survey says

[Sliver]

Originally Posted by Jason14h

Who 'needs' to trade in a car after 7 years. I guess if you had 3 kids in that time?

Originally Posted by Weitz

While all true. It really depends on what it is you are buying and what you can do with all that money instead of dumping it into a depreciating asset.

As a poster earlier stated "Rich people use other people's capital to finance depreciating assets."

To some people cars are a passion/hobby. I buy a different car every couple years. If you looked in my garage at my Sienna, Mercedes CLS550 and Cooper S Convertible, you could think I way overspend on cars; however, they were all bought used and their total worth is less than what you'd pay for a new Ford Explorer. And they're eight billion times more fun (and practical in the case of the minivan).

The best thing about cars as a hobby is it costs barely anything if you time things right. Buy low, sell as high as you can, and have fun. An unexpected repair can throw a monkey wrench into that, but I've been buying and selling cars since I was 16 and I haven't been burned yet so I'm doing okay. Pre-purchase mechanical inspections are obviously important in all this.

I think you're right that if you're going to buy new, financing is the best way to go with rates as low as they are. The other poster has the cash available, though, so buying used is more financially prudent for him unless he absolutely has to have a new car. It's not even crazy to have a new car (I was considering a new GTI for my wife next year, but I'm not loving the new styling enough to be sure on that) - but I think you're kidding yourself if your rationale is you should do it that way because that's what rich people do.

Isn't almost everything a depreciating asset? I doubt many rich people are heading over to The Brick for the Don't Pay a Cent Event. They just buy their furniture. You can get to a level of wealth where $60k on a car is nothing, and if you're going to call someone rich I think they have to be at that point. Farting around with financing a car to somebody I consider rich wouldn't be worth their time/hassle. Could be wrong on that, though. My sample size of rich guys I know is pretty small.

[stone hands]

if cars are a hobby go nuts

if cars are just a means of transportation, get something 10 years old with good mileage from an old dude who keeps good care of his vehicles for like 8 grand and pocket every single dollar in you would otherwise be spending in interest or monthly payments

[Sliver]

Originally Posted by stone hands

if cars are a hobby go nuts

if cars are just a means of transportation, get something 10 years old with good mileage from an old dude who keeps good care of his vehicles for like 8 grand and pocket every single dollar in you would otherwise be spending in interest or monthly payments

Totally agree. Non car people buying brand new cars is so weird. If you don't care about what you drive, why are you spending triple and quadruple what car people are willing to pay? It makes zero sense to me.

[Shazam]

Originally Posted by Sliver

My sample size of rich guys I know is pretty small.

I know a rich guy that remodeled his master bathroom every two years. He also told his condo board to go #### themselves when he landscaped his front yard.

After the 2008 financial crisis, he bought an entire condo complex in Arizona.

He also liked to watch porn with the volume up at the office.

[Locke]

What kind of idiot buys a Toyota Sienna? On purpose?

[burn_this_city]

There's really nice cars you can buy at the bottom of the depreciation curve, drive them for a few years and sell for what you paid or close to it. Domestic sports cars are good for this, so long as you don't mile them out. They have to be somewhat rare variants, but it definitely works. You can also buy super cheap $1,500 cars and flip them for free every year or two, half the adventure with these is keeping them running.

[Scroopy Noopers]

Originally Posted by Sliver

Totally agree. Non car people buying brand new cars is so weird. If you don't care about what you drive, why are you spending triple and quadruple what car people are willing to pay? It makes zero sense to me.

Cause this one is pretty.

[GoinAllTheWay]

Originally Posted by Weitz

As a poster earlier stated "Rich people use other people's capital to finance depreciating assets."

I don't understand this at all. As the buyer, ultimately it's you paying back the loan so how are you using someone else's capital? I must be missing something.

[burn_this_city]

Originally Posted by GoinAllTheWay

I don't understand this at all. As the buyer, ultimately it's you paying back the loan so how are you using someone else's capital? I must be missing something.

I can put $50k into a car and lose the majority of my investment in a few years. Or I can lease that car for 2.9%, put zero down and put my $50k into the market for a 8% return. You still lose money, but a lot less on the differential between 8% and 2.9%.

[Rubicant]

Originally Posted by GoinAllTheWay

I don't understand this at all. As the buyer, ultimately it's you paying back the loan so how are you using someone else's capital? I must be missing something.

You invest the money you would have spent on the car, earning a larger return on that than the loan for the car will cost you.

Obviously don't do this if you can't reliably earn a bigger return than the interest rate on your car loan.

[opendoor]

Originally Posted by GoinAllTheWay

I don't understand this at all. As the buyer, ultimately it's you paying back the loan so how are you using someone else's capital? I must be missing something.

The thinking is, if you're getting a 1% interest loan for a new car and can get 5% back through investing, you've netted a 4% return vs just paying cash.



Of course that ignores the fact that you've probably lost probably 5-10 times that 4% by by buying new vs buying a few years old car, so if you have the cash to buy a car you might as well buy a used one.

[burn_this_city]

Leasing also eliminates the amortization of the GST on the vehicle loan. They apply the GST to your monthly payment, rather than against the original principal when you buy it. It's not a significant in Alberta where its 5%, but in a province where its 13% it's a sizable amount of interest saved.

[Shazam]

If you buy new, you're pretty well obligated to keep the vehicle for a long time in terms of potential financial payback.

[DoubleF]

Originally Posted by HockeyIlliterate

People should look at this not in terms of what it costs now, but what it costs later.

Spending a sustained $6,000 a year requires, at a minimum, $150,000 in principal. Which is to say, if you believe in the 4% safe withdrawal rate (I don't, by the way), you need $150,000 to support $6,000 in annual spending.

It might not take that much work to earn $6,000, but sure takes a lot more work to save $150,000. With income taxes and the like, saving $150,000 probably requires earning at least $187,500. Or, alternatively, earning and saving something less than that amount, but not touching it and let compounding work its magic.

Either way, that $6K in spending is going to cost you a lot in terms of time and effort in the future in order to keep the $6K expenditure going. That hedonistic treadmill is an unforgiving and demanding bear.

Only you can determine if, as they say, the juice is worth the squeeze, but most people will admit that most expenditures aren't really worth it. Not worth the initial outlay of money, not worth the ongoing expense to keep it in terms of storage and housing cost, not worth the work and effort to earn the money that was used to buy it in the first place or that is needed to keep it.

There is some truth to the comment that "people spend money that they don't have to buy things that they don't need to impress people they don't like."*

But at the same time, it is becoming exceeding difficult for middle class (or lower) people to get started on a secure financial footing when employers demand pieces of paper that cost thousands of dollars for jobs that do not need them, when housing supply is being restricted to favor those who already have a house, and there is a tendency amongst those in government to privatize profits but socialize losses.



* This comment, or a variation of it, is often attributed to Dave Ramsey, but he wasn't the first to come up with it.

People don't understand things in this way though. They're incredibly short sighted. Then you add in the fricken clowns who make like $200-300K and legitimately think that a pre-approved line of credit is cash he actually owns because he can go to the bank and take it out...

I get where you're coming from, but I don't think the average person even bothers thinking of the $6K in that way. You're at best going to find people willing to agree that the $6K not spent is $6K saved which means $6K available for other things/to pay costs. I don't disagree that it's a cycle that's hard to break.

Originally Posted by burn_this_city

I can put $50k into a car and lose the majority of my investment in a few years. Or I can lease that car for 2.9%, put zero down and put my $50k into the market for a 8% return. You still lose money, but a lot less on the differential between 8% and 2.9%.

Sounds great, until you realize the vast majority of people will not invest the difference and instead spend on that home theatre, electronics, vacation, drugs etc. Then there's far less difference between the 8 and 2.9%. Just a ton of extra depreciate assets.

I've literally met the finance the asset and invest the difference type people like less than 5 times in my entire life. The vast majority of the prudent financial people are save to the max, cash down everything to avoid paying interest. Exceedingly few have the ability to think in an opportunity cost/ROI method. I've met more and more, "Don't buy a house and be anchored to it, rent forever!" type people, but they're more the type of people who literally do it because it's a lower monthly cash flow alternative to buying. They then take the difference in cash flow and blow it all on other things.

[Sliver]

Originally Posted by Rubicant

I really shouldn't complain - they are exceedingly generous. They pay for any activities (gymnastics, ski lessons etc) and offered to contribute to the kids' RESPs as well (we told them we already max those). Both our parents helped out with our educations (my wife's parents gave her a huge leg up by ensuring no education debt) so we feel we should take care of that for our kids, not them.

I'd even be fine with far fewer items of higher quality than the quantity of 'crap' they do now.

Oh man, you should never say no to free money. If they offer again, take them up on it and just divert that $210/month/kid you're contributing to their RESP into your retirement savings instead.

[DoubleF]

Originally Posted by Scroopy Noopers

Cause this one is pretty.

Who buys pretty cars? Obviously you buy the car that is cuter.

That white Lexus is obviously cuter than the white Toyota Corolla I was comparing it to. I can't define cute for you. You just know when you see it! (This was a real conversation I had with someone once)

[Fuzz]

What, the Lexus with the alien mouth? Cute?

[you&me]

Originally Posted by DoubleF

Sounds great, until you realize the vast majority of people will not invest the difference and instead spend on that home theatre, electronics, vacation, drugs etc. Then there's far less difference between the 8 and 2.9%. Just a ton of extra depreciate assets.

I've literally met the finance the asset and invest the difference type people like less than 5 times in my entire life. The vast majority of the prudent financial people are save to the max, cash down everything to avoid paying interest. Exceedingly few have the ability to think in an opportunity cost/ROI method. I've met more and more, "Don't buy a house and be anchored to it, rent forever!" type people, but they're more the type of people who literally do it because it's a lower monthly cash flow alternative to buying. They then take the difference in cash flow and blow it all on other things.

You're conflating the general population, which is the topic of this thread and "rich" people doing rich people things, which was a recent tangent.

You're right - a lot of people (maybe, like, 47%) would take on payments only to spend the difference on stupid crap.

Rich people, as mentioned earlier, will have the wherewithal and responsibility to reinvest the capital saved through financing depreciating assets into higher performing investments. This is not something expected of the broader population, but does speak to the fact that "rich" people look at and treat their purchases differently, further contributing to their status as "rich".

Same idea applies to your second point about renting. "Rich" people that actively manage their finances would probably look at the recent performance and outlook of the Calgary housing market and easily conclude that renting makes more sense (I know several 7-figure income earners that are renters for this exact reason). You correctly pointed out that this is not something the average person has the ability to properly think about from an opportunity cost/ROI perspective, but again, this thread isn't about "rich" people's spending habits.

[Rubicant]

Originally Posted by Sliver

Oh man, you should never say no to free money. If they offer again, take them up on it and just divert that $210/month/kid you're contributing to their RESP into your retirement savings instead.

I don’t believe they were offering to do 210 a month, they wanted to set up their own resp account for the kids and contribute some to that each year.

Besides, my wife is the only one on that entire side of the family to inherit anything from her parents (and her uncle).

Unless they spend everything we’ll get it eventually.

[Wormius]

^^^ Isn't that still free money to your kids if they decide to use it for education?