It doesn’t matter if you’re happily married or in the throes of a brutal divorce. You may have been a conscientious saver; you may have formed wise money-habits and are able to navigate narrow budgets with ease. But one morning you WILL wake up and feel the need to buy something – something stupidly expensive and attention-getting, and it will be right at the time you are making the most money.
So, how do you choose which silly thing to buy?
Since we’re talking about stupidity, simply opening your wallet for whatever flashy car/boat/jewel/timeshare catches your eye might seem proper, but there’s a better way to make such a massive and financially burdensome mistake. Because the question is not, can I afford it, right now, at this moment? Rather, the questions are these: What are the long-term effects of this bad decision? How much damage am I really doing? And most importantly, how can I minimize the damage while satisfying my urge to spend good money on what I don’t need (and will likely under-use)?
Now the tricky thing about a mid-life crisis is that it’s happening mid-life. These are your prime salary years and also when you have the most demands and commitments laid on you. So even if you can afford the extra payment for whatever ludicrous purchase you’re itching to make – you should judge the impact not only against your 5-10 year plan, but also against the far future of your final years.
We’ll look at two scenarios, which compare the impact of purchasing a 2019 Convertible Corvette versus a 2015 29′ Sea Ray Sundancer. Our individual has a previous baseline plan concluding at age 90 with approximately $150k in assets. As you see below, he currently has a spouse, two children, two cars, a mortgage and various other expenses typical of “mid-life”.
We’ll be using a personal financial modeling tool, OnTrajectory.com, to illustrate these two scenarios. OnTrajectory makes it easy do this sort of long-term planning, but you could accomplish the same using spreadsheets. In any case, the illustration below shows the financial effects of purchasing the Corvette:
As you can see, the result is about a $40,000 decrease overall (in “Today’s Dollars”), while still projecting a final balance above $100k. This plan assumes the Corvette is this individual’s regular car – if a different “daily driver” is also required, the financial impact would be greater.
Now let’s have a look at the “boat scenario”:
Although the monthly payment is lower, because one can finance a boat over a longer period of time, the financial impact is far greater. The first problem is that boats can’t be driven to work, so we include a car purchase at age 50. And since a 29’ watercraft cannot fit into most driveways, we have marina fees (until age 70).
In addition to the far greater spend, this scenario creates a “shortfall” of $20k, meaning this couple is projected to run out of funds during their lifetime. Of course, they could use the OnTrajectory tool to figure out how many years earlier they might sell the boat to stretch their finances farther, but you get the idea.
And of course, on a certain level, these illustrations confirm the obvious – buying more expensive toys has a greater financial impact. What’s key however, is understanding exactly WHAT destructive power those toys might have on our “retirement years” – and, one hopes, that with proper planning and the use of tools like these, we might make our poor decisions slightly less disastrous, whether during mid-life or at any other period of our lives.