Financial Planning Stuff You Need to Know

I just read a statistic that most luxury cars are leased. I’m not surprised since many people who purchase cars especially luxury cars can’t really afford them. I guess this is part of the whole upgrade trend.

From $200 jeans, to $6 cups of coffee people have decided that it’s ok to upgrade to more expensive things whether they can really afford them or not. The easy availability of credit cards makes the upgrade lifestyle easy. That is until the crushing debt load kills any hope of achieving any long-term goals.

Of course the upgrade trend didn’t spring up from nowhere. It’s funded by marketers who spend BILLIONS of dollars per year to put ideas into your heads and make you think you came up with them. (I know I used to be one of them).

Now back to cars. I happen to love cars. I subscribe to a few car magazines, read the auto reviews in Consumer Reports and I’m a frequent visitor to the Edmunds.com website. I recently even bought a car and I will admit it was hard to pay cash when I know I could have leased or financed a much more expensive car that could have impressed my family and friends (well at least my parents).

Over time the difference between buying a modest car vs. upgrading and leasing a luxury car is substantial. Purchasing a $25,000 car every 10 years would cost you about $112,000 over 25 years, accounting for repairs and inflation. Leasing a $45,000 car would cost you about $320,000 or almost THREE TIMES AS MUCH! The difference is even more substantial if you were to invest your savings over time.

It drives me crazy when I read postings on Edmunds from people who are leasing their cars saying for $9,000 more over 2 years it was worth it to drive a nicer car. The problem with this thinking is that it is short term. That $9,000 could grow to $72,000 in 25 years. Plus what will the person do when their lease is over? If they do the same thing it will be another $9,000 or more in additional costs.

I now have a pretty reliable system for guessing a new prospect’s net worth before our first meeting. If they drive up in a really nice car, almost inevitably they are not on track to meet their long term goals. The nicer the car the more in trouble they usually are. An old car is usually a good sign that they are quite wealthy. One of the wealthier prospects arrived by city bus.

A fancy car is a sometimes a good predictor of income but not of wealth or ability to meet long-term goals.

Perhaps its time we upgraded the importance of our own life goals and used or money to achieve them vs. purchasing $6 coffee, $200 jeans, and luxury cars.

When asked, most people say they are not directly influenced by advertising and make their choices based on product quality, price, performance etc, etc.  What they fail to realize is how advertising really works.

The best advertising often doesn’t directly make you jump up and purchase the product but rather integrates the product or service into the cultures value system.  The most effective advertising creates a belief that you will have greater social status if you purchase the product or service, or have greater sex appeal (yes sex still sells!)  Even better is when these values are translated into cultural norms.

One American cultural norm is that everyone spending everything they earn, and therefore your spending is a good indication of your earnings and wealth.  Although this really doesn’t make sense on many levels it is deeply ingrained in our values system.

Here is a recent example I experienced:

A recent speaker at my CEO think tank group asked if anybody had recently purchased a car.  I raised my hand since I had just purchased a car a couple of weeks earlier.  He asked the make and model. When I told him he said that car runs about $30,000, right.  When I told him it was less, he said Work with me here I’m trying to make you look better.

Here are the unspoken values the speaker was expressing:

1. The more you spend on a car the “better” (wealthier) you are
2. Purchasing a less expensive car made me a lesser (less wealthy?) person.
3. I must have purchased the most expensive car I could afford (I want to look as “good” as possible, right?)

Here are a couple of others:

• My dad’s newly found respect for a cousin of mine who recently had purchased a Jaguar.
• My client who works at a large law firm who was looked at strangely for bringing his lunch to work to save money.

We are either rewarded or sanctioned based on our adherence to these cultural norms usually by those whose opinions we value the most:  Family, Friends, and Co-Workers.

This is an advertisers dream. Having the most influential people in your life punish and reward you for not purchasing their products and reward you for purchasing them.

Unfortunately, an advertiser’s dream is probably not yours.  In order for you to assert your own values you will need to do five things:

1.Recognize the powerful forces that are aligned to impose their value systems on you and how they work.

2. Make some tough decisions on what is really important to you (see the last blog on that topic)

3. Enroll those you care about to support you in living your own values. This means having a conversation about what you want is important to you in life and what changes you have decided to make.

4. Increase the time you spend with those who provide positive support for your life goals and decrease the time you spend with those who are not supportive.

5. Develop a long-term plan to achieve what is most important to you and revisit it periodically to make sure you are or track or make course corrections.

One question I often ask my clients is this:

If you knew today were the last day of your life what regrets would you have if any?

Typical answers include:

• Didn’t spend enough time with (mother, father, sister, brother, child, friends, etc.)
• Never worked at the career I really wanted
• Never made peace with (mother, father, sister, brother, child, etc.)
• Never tried (activity)

Almost no one answers with something material.  Yet when I first meet with clients they often have a list of material things that they want.  Why the disconnect?  Why aren’t people focusing on the things that they truly want in life vs. more material things?

Certainly some things like decent housing, heat, etc. are fundamental to happiness, but above a basic living standard there is very little correlation between happiness and material wealth.  But why many of us aspire to a Lexus vs. a Toyota, or a McMansion vs. a standard size house.

I call it the “Retail Industrial Complex.”  Companies spend BILLIONS of dollars to convince you and me that if we purchase their product or service it will truly make us happy.  Unfortunately, the things that really make us happy, spending time with those we care about, doing work we really value really don’t require the purchase of a lot of material goods.

Therefore the Retail Industrial Complex spends its billions to supplant our own internal value system with their own.  Their system revolves around the product and its role in achieving happiness for you.  You will be happier because you will be (richer, sexier, m loved more by family, more envied by neighbors), if you buy our product. Of course, the product may provide a temporary boost in happiness, but after a period of time it becomes part of the routine and no longer provides the boost that it once did, because it did not address one of the key drivers of happiness (see list of regrets above).

Think about this the next time you decide that you need to spend more time at a job you don’t like, to make more money, to buy a bigger (house, car, etc. etc.), to benefit your (kids, spouse, partner, etc.)  Will your kids be happier in a big house and see you less, or a smaller house, and see you more?  What regrets will you have?

Next:  How the Retail Industrial Complex uses your family and friends to change your value system.