Nitty Gritty Financialosophy – I got into a fight over buying a new car

To be clear it was a verbal, not physical altercation! It happened several years ago as I was having drinks with some friends. They had just graduated from university and were earning very decent money in their chosen professions.

After being students for so long naturally they were talking about all the things they could spend their money on. At this stage I had already been working for around 4 years because I chose not to go to university and had a bit of a different perspective.

Cars inevitable came up and at this time the Subaru BRZ had just been released. This car in Australia was about $40,000 AUD at the time.

One of my friends who we’ll call Jared expressed a desire to buy this car. This shocked me for a couple of reasons. Jared was objectively the most intelligent person in the room. He topped the school and university scores and had the highest paying job with a top company straight out of uni. He was incredibly mathematically gifted and had a strong business mind. I was a bit dumbfounded as to how he figured this would be a good use of his hard earned money.

Before I tried to change his mind I knew I would have a challenge on my hands. Jared is headstrong and quite domineering in conversation, I am not intimidated by that at all, in fact it is one of the reasons I actually like the guy. He may come across as arrogant but usually he has the intelligence and evidence to back it up. What it means is that you better have your facts in order before correcting him otherwise you’re likely to have shreds taken off you!

I am a glutton for punishment though so down the rabbit hole I went.

I started by explaining that the $40,000 he was going to spend in his early 20’s would hamstring his later life earnings because of all the lost compounding growth on that money if he had of invested it instead. $40,000 in your 20’s is worth far more than $40,000 in your 40’s because it has so many more years for compound growth.

That’s when he dropped the bombshell that he was actually considering financing the car through a lease arrangement.

I was speechless at this point. How could someone so smart make such a dumb decision and pay interest on a depreciating asset?

Jared justified it by explaining that it was the price of opportunity cost. He worked out that it would cost an extra $4,000 to $5,000 in interest costs over a 4 year loan and he was prepared to pay this premium to enjoy the car immediately rather than waiting to save up and buy it with cash.

I admit that his explanation of opportunity cost has stuck with me ever since this discussion. It is now something I consider with every major purchase although I have still never leased anything other than my home.

I explained all the reasons why paying interest on something that doesn’t increase in value is a really silly idea and Jared kept justifying why getting access to the car now was worth it.

At this point things were getting a little heated and even though Jared and I were happy to keep duking it out explaining why each others point of view was wrong it was pointed out our ‘conflict’ was making some other people in the room uncomfortable so we dropped it.

Neither of us had convinced the other that their way was the correct way but I always felt I had given Jared pause for thought. Likewise he had taught me about opportunity cost.

Jared never did buy that car. I don’t claim credit for this, he actually ended up buying another similarly priced vehicle. When a mutual friend told me this he also told me that Jared’s parents were also going to help pay for the car.

I learnt a few important lessons from this whole experience:

1. People will spend their money on what they want regardless of whether you think it is a good financial decision or not

2. Even really intelligent people can make bad financial decisions

3. Some people have enough money that they can afford to buy “wants” without impacting their long term finances

At the end of the day, your relationship with money is often deeply personal. They call it personal finance for a reason. You ultimately only have control over your own financial future and there is little to be gained worrying about what other people are doing with their money. Even so, whether you think they are making a good decision or a bad one take the time to listen to their reasoning, you may just learn something.

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