WE all want ‘stuff’ for ourselves and for the ones we care for. That’s natural and often an offshoot of our most intense emotions.
“Don’t worry, darling! We can afford it.” These are familiar words you’ve heard on TV or overheard in real life or said to someone you love. For those of us who are gainfully employed and earn a ‘comfortable’ salary or who regularly rake in reasonable business profits, many purchases are affordable.
But precisely what type of affordability are we thinking about? Here, we will examine three different mental models or paradigms of affordability. First though, I need you to understand that I know first-hand the frustration of not having enough money to afford stuff...
Around 1979, when I was a teenager on a lengthy holiday in Singapore, I started to run out of Singapore dollars halfway through my break! I didn’t want to ask relatives for money so I went scouring for a job. I walked into a Shell petrol station and politely asked the manager if I could get a job pumping petrol. He smiled but said they weren’t hiring.
Fast-forward eight years to my first visit to New York City during a summer vacation from university in London. It was 1987, Ronald Reagan was America’s beloved President, no one other than the US military knew about the Internet, and I quickly noticed that Manhattan prices were draining the thin wad of US dollars I had pulled together after negotiating a small loan from my London-based National Westminster Bank branch manager!
So I fled the Big Apple and caught a domestic flight to San Francisco. I was met at the airport by a friend. There in Northern California I settled into a few months of gainful (and legal) employment in Silicon Valley. I was deeply saddened to leave my many new friends when I flew eastward first to Houston, Texas, and then across the Pond (the Atlantic Ocean) to London in September. I next visited my Californian friends in 1989 but vowed to never return to Manhattan until I had enough money for a genuinely pleasant stay there with all the frills.
Your life story and your life journey thus far are different. Yet deep inside your brain there are relevant mental scorch marks caused by frustrating episodes of not affording something you truly wanted.
But what I find tantalising, intriguing even, is that the straightforward concept of affordability can mean different things at different times to different people.
AFFORDABILITY PARADIGM 1
A long time ago, before the introduction of the first mass market instalment plans for Singer sewing machines around 1850 in the USA, if someone said he could afford a table or wagon or house, it meant he had ALL the money needed to pay for the item in question.
AFFORDABILITY PARADIGM 2
More recently, with the proliferation of credit schemes, when most of us say we can afford an ergonomically designed work desk or wood-panelled dining table; a motorcycle or a four-door sedan; a condo or semi-d, that just means we can afford the monthly instalments on some wants that have mysteriously morphed into our needs.
AFFORDABILITY PARADIGM 3
A smart, savvy minority exists today that understands the wisdom of using credit to purchase appreciating assets, yet exercises great caution and discipline when buying depreciating assets such as most vehicles, utensils and toys. These economically-smart people are willing to pay cash, in full, for small ticket items, yet also add a smart layer of ownership underneath their purchase of more expensive depreciating baubles.
Consider this example:
You wish to buy a RM100,000 car. You have all the money needed to buy it outright but you decide instead to pay just RM20,000 as a down payment and to finance the remaining RM80,000 at, say, an APR (annualised percentage rate) of 5 per cent, for the next four years. Let’s assume the monthly payments on that loan come to RM1,833.
Meanwhile, you have, after paying your downpayment and ensuring your Emergency Buffer Fund (EBF) is fully funded, another RM160,000 in excess funds sitting in a low yielding savings account that pays 1 per cent a year. (You have left it there and not in a 3 per cent a year FD (fixed deposit) because you have long been eyeing a blue chip stock ABC Bhd that’s expected to pay out a 4.5 per cent net annual dividend for the coming year.)
So, instead of using another RM80,000 to completely pay off your car loan, which will lose about 20 per cent of its value once you drive it out of the showroom, you move your RM160,000 out of your 1 per cent savings account into shares of ABC Bhd. You then steadily sell some shares each month or use the dividend stream when it’s paid out to fund your car loan.
If you do so consistently, four years from now, God willing, you would have paid off your car loan; your vehicle would hopefully still be roadworthy; and YOU would be undeniably richer because of the steady or more likely rising dividend income from any residual ABC Bhd shares you own!
You may be a Paradigm 2 person today, but there is nothing to stop you from contemplating Paradigm 3 options that might enrich you even as you buy, use and consume — within reason — fun, depreciating assets.
Would that be worth a shot?
©2018 Rajen Devadason