I would like to introduce you to two long time childhood friends, Bob and Jack, both are 25 years old and have been working in their newly founded careers for less than two years. They both got similar paying jobs out of college, the question is who is going to have a more fulfilling life? The choices they make today will have a lasting impression on their future.
Jack wants to celebrate his successful career by purchasing a $50,000 luxury vehicle, he has worked hard his whole life and he feels he deserves to buy something fancy for himself. He will do so by putting the $10,000 he has saved down and financing the $40,000 balance. Bob on the other hand has decided to buy an $7000 used car and save the rest of his earnings.
Now Jack gets to drive around town looking like a big shot, then over to all their buddies houses to show off his new purchase where everyone tells him what a sweet ride he’s got. Bob watches while Jack gets all the praise for his shiny new ride while Bob gets little praise, if any, for his older used vehicle. The fact is Jack feels like a success and wants to show off his success, at least for the first couple of years. However, let me break this scenario down…
Jack is going to spend the next five years paying off this vehicle, putting another $45,000 of payment into it with interest. Once it is paid off he will likely get another 5 years out of his vehicle until he decides it’s too old and wants to get another luxury car so he can show off once again. At this point he sells his 10 year old car for roughly $9,000.
So Jack who was a big shot for the first couple of years invested $55,000 and 10 years later is left with only $9,000. I hope Jack had fun because that was a $46,000 loss. OUCH!
Bob on the other hand took what money he could afford and purchased a modest $7000 vehicle and over the same time frame invested the same money jack had used to make his car payments. This means Bob started his investment account with $3000 and made monthly deposits of $800 for five years. Of course, in reality, Bob was smart and continued to make $800 a month payments after the 5 years was up, but I only want to compare the same years Jack was investing in his car until he decided to sell, this make the comparison fair.
We know how Jacks decision went. He got to look like the man for a couple of years, until his car that was once new is now just another older vehicle on the road. His investment of $55,000 has shrunk to just $9,000.
But what about Bob? Well fortunately Bob is doing a little bit better. Bobs initial investment of $3000 along with $800 a month at an annual 10% rate of return has netted him $66,885 after just five years. But Bob is not done yet. He is going to let that $66,885 compound for another 5 years at a 10% annual rate until Jack sells his car.
10 years after the initial purchase Jack is happy, he just sold his 10 year old car for $9000 and is heading to the bank while he thinks about what type of luxury vehicle he wants to finance next. However, what Jack does not know is that Bob’s same investment over the same time frame is now worth $109,137. Bobs decision to invest his money and by a cheaper used car has lead him to have a net worth of over $100,000 more than his friend Jack by the age of 35.
Fortunately for Bob, he kept saving and making good choices beyond this example and he is already thinking about retirement in the next few years.
Oh yeah, Bob was also able to sell his car for $900 at the end of the 10 years. Adding this to his previous total, now he can splurge and buy his next car for $10,000 cash and keep $100,000 in the bank.
So back to the original question, who is going to live the more fulfilling life? If you answered Jack, then this site is not for you. If you answered Bob, then you’re in the right place and I have a lot more examples on how you can safe for that better life.