On my way to work the other day, I found myself stuck in traffic (not unusual). In the lane next to mine, was a Porsche Cayenne.
The base cost of this car is around 68K in Canada. It does not include any options. When I saw this car, my first question was: “Can the driver actually afford this?”, followed by “How much does this cost every month”?
I didn’t always have this line of thinking. Not that long ago, I would have been in awe and perhaps envious. I would have automatically assumed the driver was rich. Not anymore.
I finally realized that because someone has a fancy car, a big house or designer clothes, doesn’t mean they have the actual money to buy them. It doesn’t mean they are wealthy either.
Being able to buy something and affording that something are 2 different things.
The truth of the matter is that if you can’t pay for it cash and in full, you can’t afford it, period.
Yes, it sounds harsh, but it is the (harsh) truth. Nowadays, anyone with a credit card or a line of credit can buy anything.
The problem with perceived wealth is that it does not take into consideration the liabilities associated with the assets, i.e. the mortgage behind the mansion, the lease payment behind the sport car etc….It only focuses of the material goods.
Actual wealth, on the hand, does take these into consideration. It is called “net worth”. To calculate it, list all of your assets and their value (house, car, RRSP, TFSA, savings accounts) and deduct all the liabilities ( mortgage, car payment, personal loans, lines of credit, student loans).
For example, if you have a $ 150 000 house with a mortgage of $ 140 000, your net worth is $ 10 000.
It puts things in perspective, doesn’t it?