CHAPTER
18

Investing for Luxury Purchases

In This Chapter

• Deciding whether to make that luxury purchase
• Strategic ways to pay for big purchases
• Tips for traveling, getting a car, and buying a vacation home
• Getting the most from your luxury purchase

Is there anyone who doesn’t yearn for an around-the-world tour, a top-of-the-line possession that speaks to a passionate interest, or a dream car, vacation home, or boat? Purchasing a luxury item doesn’t just mean splurging on something you wouldn’t ordinarily buy. In many cases, it represents a goal of your working life.

In this chapter we’re going to consider how you might go about achieving that purchase or experience while still getting the most bang for your buck—in other words, how to make your luxury purchase a profitable investment.

As with all investments, you’ll have to assess your appetite for risk—if this is a purchase for which there’s no specific deadline, you may be willing to invest much more aggressively, in the hope that you’ll achieve your goal sooner. Conversely, if an investment takes a downturn, it may not matter quite as much since a luxury purchase is not, by definition, a necessity or critical to your financial survival.

There are two ways to pay outright for a luxury purchase: pay for it out of your own savings or investments, or receive a windfall (lottery winnings, royalty payment, proceeds from selling an idea or company, inheritance) that allows you to think about getting something you’ve always wanted. (See Chapter 19 for more on managing sudden money.)

Before making that purchase, do you have a solid financial goals plan in place? That means, are you contributing the maximum to your workplace retirement plan? Are you investing enough, if necessary, outside your workplace plan to arrive at retirement with enough portfolio income? Do you have an emergency fund? If you’re saving for the kids’ college, is that on track? If you’re at an appropriate age, do you have a long-term-care plan, and estate documents? No? That’s the stuff that needs to be taken care of first. Yes? Congrats, maybe it’s time to be nice to yourself!

Deciding If a Luxury Purchase Is Worthwhile

First you should reflect a bit on what your luxury purchase is worth to you. As with purchasing stocks or other investments, there are always multiple options. With investments, you’ll probably consider a variety of possibilities as you try to decide which makes the most sense. You should apply some analysis to your prospective luxury purchase, to determine whether it’s what you really want, and at what scale.

Developing a Decision Scale

Let’s walk through how to develop a decision scale. First, choose something you really love to do or buy, don’t do very often, and know the price of. I’m going to use a 3-day, 2-night weekend at a nice little bed and breakfast within driving distance of my home. I’d do this as often as possible.

What’s it going to cost me? Let’s call it $200 per night ($400 total) for the B&B. Say the town has a lot of cute little restaurants and I want to eat well, sample a few craft cocktails, and have a decent bottle of wine. I’ll chalk up $200 per day for food (breakfast is free at the B&B). I’ll probably eat breakfast at home on Friday and get back to my house for dinner on Sunday, so let’s make it $500 total for food. Include $50 for a tank of gas. It’s a pretty good bet that I’ll do some shopping in all the cute little stores, so let’s just call it $1,000 for the weekend, although it would be easy to spend more. Let’s assume I currently go on four of these weekends a year.

Now I have a concrete standard to measure any purchase against. Would I enjoy buying that luxury item more than I would enjoy a weekend at the B&B? Would my purchase have more entertainment value? Would it give me more lasting pleasure?

Let’s say I want a nice new bike. The one I have is perfectly functional, although ugly, so buying this new one is purely for fun, not because I truly need new transportation. (Substitute new car if you wish—the numbers for a bike are easier to manage.) The bike I covet costs $4,000. That means I’m going to give up the possibility of four nice weekends away, and also some really great time with my daughter, who usually goes on these weekends (a somewhat intangible benefit) but won’t have anything to do with the bike.

Maybe I belong to a bike club, and a new, lightweight bike would allow me to participate in more and better expeditions with the group and, therefore, I wouldn’t want to go away from May to October anyway. There’s at least a $2,000 contribution redirected to the bike fund because of two weekends I wouldn’t be going to the B&B. Also, I have a goal of better fitness and I’ll definitely ride more if I have this wonderful bike. The bike will last me at least 2 years, so it’s paid for by redirecting money away from one activity and toward another. Certainly a reasonable luxury in these circumstances.

Alternatively, let’s say I’m lazy and would never go on a 50-mile bike ride (closer to reality, actually). I want the bike because it’s a beautiful object, works with a precision I’ve never before experienced, and will impress people every time I tool down the street. Also, I’m hoping it will encourage me to ride more and get fit.

Here, the choice is less clear. If I gave up only 1 weekend, I could probably replace the old clunker with a nice $500 model and join a health club at $30 a month for a year. Would I like a $500 bike as much as a $4,000 bike? Probably not, but for the use I actually put it to (pedaling to the grocery store and the library), it would be a nice change at a more affordable price. And I’d probably use it more because I’d be less afraid of it getting stolen or scratched, which would make me sick if it cost $4,000. So in this scenario, the real luxury would be not giving up the weekend trips, but getting a moderately better bike.

The Yardstick-of-Luxury System

One more scenario: I adore sewing and make a lot of garments, with the odd quilt and dog coat thrown in. When my machine went kaput 3 years ago, I wanted something top-of-the-line, because, well, my skills are top-of-the-line. But to my shock, sewing machines have gotten a bit more expensive over the past 20 years, since I paid $3,600 for my old Viking. As in $14,000 expensive for a current top-of-the-line model (which, if I analyze investments as doubling every 10 years, actually makes the current price just about equivalent, but gives us a sewing machine inflation rate of 7 percent).

I went home and analyzed the features I actually use. I made a list, went back, and purchased an embroidery machine with a ton of stitches for about $1,800. Does it give me more pleasure than two weekends away? Absolutely—I use it every week, and I’ve now had it for 3 years, so the total “pleasure” cost is $600 a year. If you have a hobby that actually saves you money (I’m not sure sewing clothes does), you might figure the savings into your cost analysis.

I have a friend who is an incredible quilt artist. She also teaches classes on weekends, it’s just about her only hobby, and the vacation she takes is to the huge quilt show in Paducah, Kentucky. She has a sewing machine the size of an old Volkswagen, and its sticker price is around $14,000. Would it be worth giving up weekends away for, like, forever? Not for me, but she’s figured out how to make this luxury work. (See the next section on ideas for strategies to make luxury purchases worthwhile.) And in her case, because she has a side business as a quilting instructor, at least some of the cost of her machine, and supplies for samples and demos, is deductible against the income she earns in the business.

This yardstick-of-luxury system can be applied to almost any purchase you contemplate, and illustrates that all expenditures require at least some choices. Would a vacation home give you more pleasure than a yearly trip to Paris? Would it be more satisfying to drive a BMW or have a sailboat? How much time do you have to actually use your purchase, or will it collect dust? How much will it take to maintain one versus the other?

Even if you win the lottery, you will still have choices to make. Even if money is unlimited, time is not, and at some point you will reach a point where you don’t have time to enjoy what you have. Make planned choices and keep control of your wealth.

Strategic Ways to Buy Luxuries

Pay cash or don’t buy at all, we often hear. But many sellers of luxury goods have figured out that they’d sell a lot more if there was some other way than cash to peddle their wares.

Enter 0 percent financing. Theoretically, you negotiate your purchase price and then make payments over an agreed upon-period of time—let’s say 5 years.

With this type of financing, however (sometimes available for cars, sewing machines, and any variety of durable consumer goods), you must be very careful to puzzle through any hidden costs. Would you have gotten a much better purchase price if you’d have paid cash? There may not be any financing charge, but if you could have gotten 10 percent off the purchase price, that’s what you’ve paid for financing (which may be worth it or not).

Are there other service charges added at the last minute? Can you get out of the financing or return the product if it proves unsatisfactory? If you miss a payment, what happens to your rate?

If the interest charge is truly 0 percent, or if the interest cost is lower than you could reasonably expect to make by keeping your money invested over that time period, go with the financing.

What about trade-in value? You may decide to upgrade during the term of the financing or at the end. How will your purchase be evaluated? Trade-in value can be particularly important if you’re purchasing a product whose technology is rapidly improving and which may be obsolete in 5 years.

In such circumstances, a monthly payment becomes more like a subscription or use fee. Remember my friend the quilt artist? She trades in her computerized sewing machine for an upgrade at the end of the period, and always has the (luxury of) the most current tools for her art.

“If I Had More Money I Would …”

The number-one thing people tell me they’d do with more money is travel. Buying a better car is second, and third in the running is a vacation home. In this section we’ll look at each of these three luxury purchases with an eye toward obtaining them as economically as possible.

Travel More for Less

If you want to travel better and/or more often than you could otherwise afford (at whatever level of luxury), there are ways to work the system. As in all money-stretching schemes, you either need to invest time or money, then make it work for you. Investing time in learning about the travel points game can make your money work far harder.

Before getting into the specifics of using points, please be certain you can pay your credit bill off each month. No amount of points is worth getting over your head in debt.

Over the last 3 years, I’ve been able to accomplish the following (always with my daughter included, so these figures apply to two people):

• Flew from Chicago to Miami and took a 5-day cruise to the Western Caribbean. Total cost: approximately $400 (for shore excursions).
• Spent a long weekend in St. Louis at a top hotel. Total cost: approximately $300 (for gas, two dinners, one lunch, and museum admissions).
• Flew from Chicago to Key West, with 5 days in Key West. Total cost: approximately $500 (for food and drinks).
• Flew from Chicago to London, 10 days total, including 2 days in Bath and 1 day in Oxford by train. Total cost: approximately $1,000 (mostly food and museum admissions).
• Flew from Chicago to Austin for a professional conference for 2 days. Total cost: approximately $200 (for the hotel because I didn’t have enough points on my card to cover the whole cost of 2 days).
• Flew to Philadelphia for my daughter’s graduation, stayed for 3 days, took the train to New York City, stayed for 4 days, and flew both of us home from New York. Total cost: approximately $1,000 (museum admissions, Broadway play, restaurants, and subway/cabs).

Right now you’re thinking, I’ve been amassing flights on Crowded Airlines for about a million years and I still don’t have enough points to make a single round trip. You’ll feel worse when I tell you I almost never travel for business. Let me outline how it’s done. (See Appendix B for more resources.)

Sign up for credit cards with sign-up bonuses. In order to do this you must have a very good credit rating (740 or above for the best cards). These cards will give you anywhere from 10,000 to 100,000 bonus points (rare, but I did get 100,000 from British Airways). There may be a yearly charge (sometimes waived for the first year) and a minimum amount you must spend ($3,000 in 3 months, $6,000 in 3 months, and so on) on the card. Be sure you can meet the spending minimum or you’ve wasted the application. Also, watch what the yearly fee might be. If it’s $85 a year, you need to get more than 8,500 points to break even (depending on the redemption value of the points).

Some cards will give you upgrade perks as well. You might get a few airport lounge passes, an automatic hotel status upgrade, free baggage check, and if you spend enough on some hotel cards (for people who travel for business) you’ll get room upgrades and private lounge access. Focus on amassing airline points and you can use points to upgrade from coach to business or first class.

Most people do well with a couple of hotel cards for chains that are located in their destination, an airline card or two, and a couple of points-earning cards that apply to any travel.

Funnel virtually all your spending through the appropriate card. Some cards will give you much higher points for spending in certain categories. For example, I use a business card that normally gives you 1 point per dollar, but on office supplies, internet expenses, and a couple of other categories I get either 5 points or 2 points per dollar. Another card gives me 2 points on any purchase. A hotel card gives me 5 points at grocery stores.

Even if the card doesn’t have a “favorites” category, funneling everything you can through the card—anything that won’t charge you a service fee for using a credit card—can really build up points over time. As long as you pay the balance off each month, it’s easy to rack up a lot of points.

That’s it. Your work is going to be to figure out what cards will be most worthwhile to you. Figure out a couple of places you would like to go, know which hotels and airlines are on that route, and concentrate your card applications on those. Since it can be a little confusing which card to use where, I just stick little paper circles on my cards with “Groceries,” “Gas,” and so on.

Your credit score will take a temporary hit, about 20 to 30 points per card in my experience. This is because a number of credit inquiries will suddenly show up, and because your average length of credit history will shorten. These are minor. Within about 90 days your score will be back to normal, and you might even see an improvement—because credit score also is influenced by your credit utilization ratio. If you’re planning on applying for any type of loan, do that before beginning credit card applications. But as long as you’re not buying a home or car in the next 90 days or so, you should be okay.

As with many plans for profiting from investments, if it were easy, everyone would do it. It does require some research, experience to maximize return, and a bit of risk (applications, turn-downs, and credit score). Just like every other investment.

Getting That Car

In the past, the most economical way to purchase a car was to pay the negotiated price with cash (to wrangle the best deal), keep the car until the wheels fell off, sell it for whatever you could (when it was essentially worthless), and start over. Most of us went the more costly route, providing a down payment, then paying for 3, 4, or 5 years. The car could then be kept or traded in.

However, leasing has become a viable option, especially if it includes maintenance for the life of the lease. Lease payments are significantly cheaper than car payments for purchase. Depending on the brand and the deal you negotiate, you may get free maintenance for 5 years, or none at all beyond the warranty. It’s the difference between cost to carry (the payments including financing, or lost investment income from paying cash), which goes down the longer you keep the car, and the cost to operate (the maintenance, service, and repair costs). In general, the more expensive the car, the more expensive the operating costs.

Consumer Reports can give you a good idea of total ownership costs for the car you’re contemplating. A car with a poor repair record is no luxury, because you’ll pay plenty in time and aggravation.

Leasing can put you in a better car than you might otherwise afford and allow you to upgrade more frequently, but it’s important to remember that when the lease is over, your car is gone. Don’t allow a desire for luxury to lock you into an agreement that you really can’t afford. Having a car repossessed is a disaster for your credit and probably your self-esteem. If you’re considering leasing, it should be used as a way to lower your costs, not as a way to upgrade to more than you can really afford.

The most successful strategy I’ve seen for purchasing a vacation home is to keep your primary home’s cost on the low side of what you can afford. As I discussed in Chapter 16, upgrading your home every time your income rises tends to be a risky strategy that can be wealth diminishing. But if you do the opposite (keep your housing costs under what your income qualifies you for), you’re likely to have more money to make loan payments, qualify for better rates, and have more ability to save for a down payment or even pay cash for that dream retreat.

Before you plunge in, however, I’m going to suggest you think carefully about how often you will use the property. Is it within easy driving distance of your primary residence, or will you have to fly every time you visit? Do you have the sort of job where you can easily take 3-day weekends or work remotely? Have you visited the area frequently? Falling in love with Key West when you live in Chicago is probably not the best idea for a stress-free, frequent retreat.

Next, think about maintenance, cleanup, and security. Will you be spending spring and fall weekends housecleaning and doing yard work at a second place, or does the property (or the area) have a service that handles that? Will you have to make a 4-hour drive if someone breaks in?

If your planned vacation home is part of a complex with management services in place, know what the nonowner rental rules are. If the place is primarily rented to nonowner occupants, there’s going to be far more wear and tear, resulting in higher assessments for all owners, and a shorter lifespan for the property because of more wear and tear. On the other hand, if you can’t rent it or are restricted in the number of days you can rent it, you’ll have no way to ease the costs of a property you aren’t using.

Compare the costs of what an equivalent hotel space or renting someone else’s vacation property would cost you, especially if it’s just for a month or two in season. Add it up for, say, 10 years. Would you really go back there that often?

What are the property taxes? Since you may not be considered an owner-occupant by the local taxing authority, your property taxes may be higher than year-around residents.

You’re going to need insurance on the property. Also, over time, you’re going to have to think about updating décor, replacing appliances and furnishings, and paying minimum heating and air conditioning to keep the place from freezing, becoming mildewed, and getting infested with creepy crawlies.

Will you use the property only in season, or are there activities that appeal to you for at least three seasons? What about the rest of the family? If multiple generations of the family will gather at the vacation home, or someone will use it just about every weekend, it can be a terrific family experience.

Finally, have an exit plan. I can pretty well guarantee you’re not going to be making a 4-hour drive or flying to Key West 6 times a year when you’re 95. And if you’re buying a vacation home for future retirement, check out the health care and available transportation (especially off-season). Being out in the woods with 3 feet of snow on the ground and chest pains is not a happy prospect.

However, not everybody uses a vacation home in the same way. For some people, it’s used a month or so in the summer, with the property rented out for the other months. This can give you some help with the cost of purchase (perhaps with a plan that you’ll stop the rental in the future). I’ve already mentioned that you should know rental rules and figure out the cost of wear and tear, maintenance, and cleanup before you do this (and if you’re the cleanup squad, figure in whether you have time to do so). In your plan, you should also consider tax consequences.

Rental income must be reported to the IRS. You can deduct rental expenses up to the amount of income, if you use the home more than 14 days per year, or more than 10 percent of the time it’s rented to other people (whichever is greater). You are then considered a resident. You must divide the expenses between the number of days you use it, and the amount it is rented.

However, if you rent it for fewer than 15 days, you don’t have to report the income, although you can still deduct mortgage interest, property taxes, and casualty losses.

Some other things to think about: How popular are rentals in the area? Have you talked with other property owners in the area? What if the weather is bad, or the economy takes a dive, or gas prices or airfares skyrocket, or somebody will only rent from you if they can have it for the whole summer? These aren’t necessarily reasons you should discard the idea of purchasing, just issues to think over if the financial viability of your plan depends on some rental income.

Sometimes family vacation homes are left in equal shares to the children. You need a better estate plan than that, including how shares can be bought or inherited. It’s fine when you have three children who get along and enjoy using the property. But what happens in the event of divorce? Death? What if all your children are gone, but they each had three children, some of whom live far, far away? By the third generation it’s easy for a family property to be owned by dozens of people, many of whom will not want to pay the taxes or upkeep. Be sure your estate plan considers these eventualities and provides a mechanism for transferring ownership.

No matter what luxury you have your eye on, you should consider all the costs of ownership: not only purchase price, but cost of financing, insurance, maintenance, depreciation, residual value, and passing it on when the time comes. Investing sensibly in luxury is a lot of work!

The Least You Need to Know

• Whatever you purchase or invest in requires sensible choices so be sure to weigh the tradeoffs between owning, leasing, financing, and forgoing other possible uses for the money.
• Consider how much you will actually use and enjoy the luxury purchase after the first thrill.
• Consider not only the purchase costs, but the costs of ownership.
• A credit card points-accumulation strategy for travel can help you travel more for less, but you should only do it if you can manage your credit card spending.
• Calculate carefully to see if buying or leasing a car makes better financial sense in your situation.
• Think through repairs, maintenance, insurance, taxes, and financing costs before purchasing a vacation home. Also consider whether you will use it enough to make owning worthwhile.