How Much
to Spend on Luxury Items – Car, Watch, House, Mobile Phone &
Ring?
The Apple Watch or a Rolex? If you are in the market to
buy a new watch, the choice is getting harder. The Apple Watch has
super functionality, and at $1000 for a high-end version, the
outlay would be only two weeks of your salary if you were a
secretary. A basic Rolex, in comparison, will cost four months of
your salary. Unlike the Apple Watch that will begin to devalue as
soon as you walk out of the Apple store, the price of a Rolex
Submariner has jumped from $4000 to $8000 over the last 10 years,
according to A Blog to
Watch.
If you are like most consumers, you are spending more
of your salary on luxury items than your parents or grandparents.
Do you know the opportunity cost of all that money you are
allocating to luxury goods? In other words, if you invested that
money elsewhere, such as in real estate or mutual funds, would you
increase your return? Keeping in mind a few rules of thumb can stop
you from recklessly overspending.
The best-known rule of thumb is how much to borrow when
buying a house. Many experts estimate 2 ½ times your annual salary,
but ultimately your mortgage size will be determined by your
personal financial situation. But what about other items? How much
should you spend on your new watch?
Read: 6 Types of Private Property in Singapore
“The right time to start buying luxury watches is when
you start realising some success,” says John, a banker and watch
collector on a watch collector’s blog. Let’s say you are making
$2000 a month and decide to start investing in your future early.
You choose to buy the Rolex Submariner for $8000, which is the
average price of a low-end watch.
The math is simple – 4 times your monthly salary.
Alternatively, you could buy in the used or vintage
Rolex market and choose, say, a $2000 watch at one time your
monthly salary. The future return will be lower but so is the risk.
The Guide to Buying Your First Rolex can help
you navigate both the new and vintage Rolex markets, as well as
other luxury watch items.
The average price of an iPhone is $687US, and expected
to rise, according to AppleInsider.com. For other smartphones, the
experts say we are overpaying. In 2010, the average smartphone
price was $420US. In 2014, it fell to $280US, according to the
Consumers Electronic Association.
We like the frugal thinking of the Financial Samurai
and the 1/10th Rule for Car Buying. If you are making
$42,000 a year, spend $4,200 on a car. Are you crazy? You ask. All
my friends are driving BMWs! Be less concerned with what your
friends drive, and more interested in what billionaires drive.
Warren Buffet just sold his 2006 Cadillac. He has
replaced it with a brand new Cadillac ETS, but we are sure it meets
the 10% rule (2013 Income: $37million). If you invest the $15,000
you will save, when you retire in 40 years, it will be worth about
$50k, at a modest 3 percent interest rate.
If you replace your car every 5 years, the money saved
could add up to over a quarter million dollars by the time you
retire. When to sell? Sell when the market value of the car is less
than 10 percent of your income.
No doubt, many jewellers see an easy target when a
young man in love seeks to buy a ring for his beloved. To avoid
being taken to the cleaners, establish your price limit in advance.
People spend about one month’s salary, or $4,000, on an engagement
ring, according to the American Jewelers Association. The retail
clerk may try and get you to pay more by convincing you that gold
is a good store of value and investment in the future.
Gold prices can be volatile, and returns differ greatly
depending on the investment horizon (see below).
Luxury Asset Appreciation
Curbing your overspending on goods does not mean you
cannot buy the Rolex watch you are eyeing through the shop window.
Many luxury goods can be treated as assets rather than liabilities
( expense) on your personal balance sheet.
Those who overspend on luxury items are not always
throwing money out the door. Many investments
of passion increase in value over time. Top performing
luxury goods in the Knight Frank Luxury Investment Index (KFLII)
include classic cars, art and wine.
The 10 luxury asset classes tracked by the KFLII grew
10 percent in 2014 and 205 percent over the decade.
Buyer beware! Within each asset class, some items will
perform worse while others will increase more in value. Coloured
diamonds, a new addition to the index, have risen 167 percent since
2005, but this is the same increase as the wider jewellery
index.
Stocking up on gold jewellery may not be your best bet
either. The SPDR Gold Trust rose about 150 percent over the same
period. Despite the widely held belief, gold as a store of value and hedge against
inflation may not be the best investment. Gold returns
show a weak correlation with inflation, says Daniel
Fisher in Forbes, who concludes that you may have to live a long
time for gold to hold its value.
Take heed of the advice of consultants who advise those
collecting luxury items requires expertise. If you do not do your
homework, you may be better off parking the money in
a mutual fund.
thenewsavvy