You can buy an early 2000’s V12 Aston Martin DB7 in great shape with low miles for <$40,000 all day long. You can also find some castles in Europe priced less than the McMansion down your street. Part of the reason why these things appear so cheap is because of the unavoidable carrying costs.
Carrying Costs: the price of holding inventory… this may include storage costs, maintenance, insurance, taxes, loss due to theft, fuel(s), depreciation, and opportunity cost.
I could go out today and buy a V12 Aston Martin – but if the emergency brake cable snaps, it’ll cost me approximately the price of my current car to repair (not joking). No thanks. I’d have to keep at least $15,000 liquid just to fix the car should something major break. Insurance would also be outrageous. I would worry about thieves so the car would need to be garaged each night. Maintenance and repairs need done at a dealership or else the value of the car goes down (nitpicky second-hand buyers). Driving it to a dealership would take me half a day at least! The Aston would cost me much of my most precious asset – time. Buying the car isn’t as easy as withdrawing $40,000 and shaking someone’s hand.
Same goes with buying a castle. The initial price isn’t so scary but your monthly heating bill will be.
But heck, I don’t really like talking about depreciating assets like cars or more neutral assets like houses/castles. P.S. Is a castle is Europe just called a house? Surely not. But do you say, “I’m looking to buy my first starter castle.” Or, “I need a 20% down payment on my castle.” If you know, do comment!
So what about appreciating assets… like baseball cards, Cracker Jack toys, and Beanie Babies*. Just kidding. What I mean is that investing in the stock market has its own share of carrying costs which ONE SHOULD NEVER FORGET ABOUT! Expense ratios, opportunity cost, taxes, etc. all must be considered. The main carrying cost to consider is the funds expense ratio. DO NOT overlook this! Consider watching this documentary for an informative lesson in watching your investment expenses.
I need to think beyond the initial purchase price. There’s a saying…
‘Poor people think to the weekend, rich people think to the long-term future.’
This means rich people think about carrying costs.
What I need to do with all purchases is determine their purchase price and then consider their annual cost. Do I really want to spend my hard-earned money fueling up a V12 or heating my 7 empty bedrooms?
* I still have about 50 Beanie Babies in a drawer from when I was little. Maybe in 100 years they’ll be worth MILLIONS! 🙂