“When the tide goes out, then we will see who has been swimming naked” is my favourite Warren Buffett quote.
Let’s look at two people, Bob and Billy, who want the same things:
– the latest fruit smartphone £700
– a flash watch £1,000
– a sporty new car £19,000 (for example a Ford Fiesta ST)
– a top fruit laptop £1,500
Billy has everything today on finance, while Bob saves up an amount equivalent to Billy’s monthly repayments.
After only 3-4 years Bob can buy the same things for cash, and then start saving towards their replacement at some point in the future based on expected life.
(You can get many items at a discount for cash. Sometimes, crazily, you can even get a signing discount by signing up for finance and cancelling it the next day – settling the discounted amount with cash instead before any interest charges!)
So, the only difference is that Bob waits 3-4 years initially – after that he can also upgrade the items regularly in future just the same as Billy, but from savings rather than finance.
If we meet up with them both shortly after they have bought these things then they might both appear to be successful people however…
If the tide goes out and they both lose their jobs, then we find out the real situation:
Billy can’t afford the repayments, so not only does he have everything repossessed he is also left with debts of many thousands. He will be paying for things he no longer owns for many years to come.
While Bob has assets that he can realise should he need the funds. Even though the second-hand value of many things is much less than the retail amount he would have paid, he will be in a much better position. He could even just trade down to better value options, keeping the same types of things while also freeing up cash for the immediate future.
Be like Bob, not like Billy.
An article in the press yesterday: