How Much to Spend on Luxury Items – Car, Watch, House, Mobile Phone & Ring?
The Apple Watch or a Rolex? If you are in the market to buy a new watch, the choice is getting harder. The Apple Watch has super functionality, and at $1000 for a high-end version, the outlay would be only two weeks of your salary if you were a secretary. A basic Rolex, in comparison, will cost four months of your salary. Unlike the Apple Watch that will begin to devalue as soon as you walk out of the Apple store, the price of a Rolex Submariner has jumped from $4000 to $8000 over the last 10 years, according to A Blog to Watch.
If you are like most consumers, you are spending more of your salary on luxury items than your parents or grandparents. Do you know the opportunity cost of all that money you are allocating to luxury goods? In other words, if you invested that money elsewhere, such as in real estate or mutual funds, would you increase your return? Keeping in mind a few rules of thumb can stop you from recklessly overspending.
Rules of Thumb On How Much to Spend On Luxury Items
The best-known rule of thumb is how much to borrow when buying a house. Many experts estimate 2 ½ times your annual salary, but ultimately your mortgage size will be determined by your personal financial situation. But what about other items? How much should you spend on your new watch?
“The right time to start buying luxury watches is when you start realising some success,” says John, a banker and watch collector on a watch collector’s blog. Let’s say you are making $2000 a month and decide to start investing in your future early. You choose to buy the Rolex Submariner for $8000, which is the average price of a low-end watch.
The math is simple – 4 times your monthly salary.
Alternatively, you could buy in the used or vintage Rolex market and choose, say, a $2000 watch at one time your monthly salary. The future return will be lower but so is the risk. The Guide to Buying Your First Rolex can help you navigate both the new and vintage Rolex markets, as well as other luxury watch items.
The average price of an iPhone is $687US, and expected to rise, according to AppleInsider.com. For other smartphones, the experts say we are overpaying. In 2010, the average smartphone price was $420US. In 2014, it fell to $280US, according to the Consumers Electronics Association.
- How Much to Spend On A Car – 1/10th of Annual Income
We like the frugal thinking of the Financial Samurai and the 1/10th Rule for Car Buying. If you are making $42,000 a year, spend $4,200 on a car. Are you crazy? You ask. All my friends are driving BMWs! Be less concerned with what your friends drive, and more interested in what billionaires drive.
Warren Buffet just sold his 2006 Cadillac. He has replaced it with a brand new Cadillac ETS, but we are sure it meets the 10% rule (2013 Income: $37million). If you invest the $15,000 you will save, when you retire in 40 years, it will be worth about $50k, at a modest 3 percent interest rate.
If you replace your car every 5 years, the money saved could add up to over a quarter million dollars by the time you retire. When to sell? Sell when the market value of the car is less than 10 percent of your income.
No doubt, many jewellers see an easy target when a young man in love seeks to buy a ring for his beloved. To avoid being taken to the cleaners, establish your price limit in advance. People spend about one month’s salary, or $4,000, on an engagement ring, according to the American Jewelers Association. The retail clerk may try and get you to pay more by convincing you that gold is a good store of value and investment in the future.
Gold prices can be volatile, and returns differ greatly depending on the investment horizon (see below).
Luxury Asset Appreciation
Curbing your overspending on goods does not mean you cannot buy the Rolex watch you are eyeing through the shop window. Many luxury goods can be treated as assets rather than liabilities ( expense) on your personal balance sheet.
Those who overspend on luxury items are not always throwing money out the door. Many investments of passion increase in value over time. Top performing luxury goods in the Knight Frank Luxury Investment Index (KFLII) include classic cars, art and wine.
The 10 luxury asset classes tracked by the KFLII grew 10 percent in 2014 and 205 percent over the decade.
Buyer beware! Within each asset class, some items will perform worse while others will increase more in value. Coloured diamonds, a new addition to the index, have risen 167 percent since 2005, but this is the same increase as the wider jewellery index.
Stocking up on gold jewellery may not be your best bet either. The SPDR Gold Trust rose about 150 percent over the same period. Despite the widely held belief, gold as a store of value and hedge against inflation may not be the best investment. Gold returns show a weak correlation with inflation, says Daniel Fisher in Forbes, who concludes that you may have to live a long time for gold to hold its value.
Take heed of the advice of consultants who advise those collecting luxury items requires expertise. If you do not do your homework, you may be better off parking the money in a mutual fund.
Check out the Money Checklist for Your 20s, 30s, 40s.