It was 1997 and I was patiently waiting in line at my bank (yes, this this was a long time ago).
I remember at the time there was an animated customer in front of me who was not exactly shy about her finances that day.
The reason for this customer's excitement was because she had won approximately $55,000 through a lottery, and despite the teller's attempts at cross-selling her bank's financial planning services and term deposit rates, she had already told everyone in the branch of what she and her husband were going to spend this money on.
They were purchasing a new Nissan Patrol and, no doubt, they may well have had some fantastic experiences with this vehicle as they travelled the country, and at the same time impressed their friends and family.
I also remember that I instantly started calculating in my head this woman's lost financial opportunity.
According to www.redbook.com.au, a 1997 Nissan Patrol, when new, was retailing for $49,635 before dealer-delivery and stamp duty costs. With accessories, the total cost would have come close to the $55,000 the bank customer said she was going to spend on the vehicle.
Today's trade-in price is between $5,000 and $7,500, so the compound annual growth rate (CAGR) for the Patrol is between -9.96% and -11.38% (and that's before even considering the insurance and running costs of the vehicle).
What if she decided to invest this money in the share market instead?
The opportunity cost of buying a big-ticket depreciating item
I'm hoping I can illuminate here the real cost to a person who chooses instant gratification today over share market returns in the future.
Below is a table that shows a comparison of how this $55,000 could have performed between the S&P/ASX All Ordinaries Accumulation Index, BHP Billiton Ltd (ASX: BHP), National Australia Bank Ltd. (ASX: NAB), and CSL Limited (ASX: CSL) between 1 July 1997 and 31 March 2016.
The results are below and, don't forget, this time period includes the effects of the 'dot-com' crash in 2000 and the Global Financial Crisis of 2008-09.
| Approximate CAGRbetween 1 July 1997 and 31 March 2016(%) | Value of $55,000 as at 31 March 2016 | |
| 1997 Nissan Patrol RX GQ Manual 4×4 | (9.96) * | $7,500 |
| S&P/ASX All Ordinaries Accumulation Index | 7.70 | $225,000 |
| ASX: BHP | 9.59 | $313,336 |
| ASX: NAB | 10.17 | $346,390 |
| ASX: CSL | 25.67 | $4,224,383 |
* I'll be generous and assume you could trade the vehicle in for $7,500 today
The thing that concerns me about the above scenario is that the $55,000 was a windfall … and it was probably squandered.
Motor vehicle expenses are a normal cost of living for most people, but I'm not talking about that here.
What I'm focused on is where an unexpected gift or a lottery win, for example, happens to land in your lap, or if you're fortunate enough to be in the luxurious position of having spare cash.
Is buying an expensive, depreciating vehicle really the best financial decision to make, especially when you may not really need the vehicle in the first place?
Of course, this exercise applies to any motor vehicle purchase, not just a Nissan Patrol!
At the higher-end, a 1997 BMW 535i E39 Auto could be had for a cool $118,800 (1997 dollars remember), and again, that's before normal associated on-road costs.
Today's trade-in on the BMW is worth anywhere between $1,400 and $3,300 according to the Red Book website (ouch!).
No matter how good the drive is, and no matter the amount of 'prestige' that can be bought with such a vehicle, I'm not sold on the concept of squandering financial potential just to 'impress' the neighbours.
Foolish takeaway
The lady in the bank could have sold 650 or so of her CSL shares today, left some money aside as a provision for capital-gains tax, and still have been able to buy a base-model 2016 Nissan Patrol today, leaving her with 36,080 or so shares in the company (at $115 each).
Is the need to have it now really worth it?
Even buying the index, or ASX laggards BHP and NAB, would have at least got you a positive return.
The worst thing is, the buyers of luxury cars think they're only spending the asking price for the vehicle. The opportunity cost doesn't even factor into their thinking or they're lacking the knowledge of the full financial consequences of their decisions.
Which would you rather?
If you think about these issues before spending up big, you'll give yourself every opportunity to actually be wealthy rather than just pretend to be.
It's your choice.
