I once read that the average person will experience a financial windfall at some point in their lifetime, and I believe it. Although you may not have this type of money today, it certainly is a good exercise to think about what you would do with it for two reasons:
1) It will help you understand your mindset.
2) It pays to prepare.
So the question is, what would you do with $100,000? There are millions of choices you could make, but each can be categorized into one of two boxes, consuming or investing.
When we consume, we buy things that get used, depreciate, disappear and so on. These are liabilities. At the end of the consumption period, they are either worthless, devalued or gone altogether. This includes cars, clothing, furniture and so on. Even as you read this you may struggle for examples of how these things increase in value, and you could be right, but you really do not want to consider personal belongings assets since they do not pay you to own them. On the contrary, they many money to maintain (especially the larger luxury purchases) and most go down in value.
Using an example of a car purchase, let’s say we buy a $100,000 car. To make it fun, we bought a new Chevy Corvette Zr1 and got a great deal at $100,000 out the door. Let’s visit the potential welfare of that investment after 10 years.
Purchase price: $100,000
Annual Maintenance -$5,000
Value of “Asset:” $60,000
Cost of Ownership: -$50,000
When it is all said and done, your new car lost 40% of its value and cost half of its purchase price in maintenance over 10 years. But its a really nice car!
Now, let’s say that you choose to invest that money in spite of what your friends (who probably own Corvettes) say about how risky investing is. With $100,000 invested as a limited partner in apartment syndication, let’s check out the numbers, assuming a modest 10% annual return(AAR) over 10 years.
Average Annual Return (AAR): 10%
Future Value: $161,051
After 10 years you turned your $100,000 into $161,051 in the same amount of time that you would have lost 40% of your investment’s value buying a cool car. Now you can buy three used corvettes (but why would you?).
This illustration is not to condemn material purchases, but to highlight the important mindset of wealth creation, which sometimes means forgoing consumption for future wealth. Having a a solid investment plan is essential for getting to where you want your family to someday be.
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Rodney Robinson II