Such hard work, part two.

The cover story for this month’s Toronto Life is “What you get for $500,000“. The pictures on the front cover range from a 3000 square foot 4 bedroom monster in Oakville, to a 1 bedroom low-rise Yorkville condo, to a 94-year old towering detached Edwardian in High Park.

Visually, I think it drives home the point that very little of what we buy can actually be considered an asset. It’s definitely not the accountant’s definition, but things I consider assets are those that appreciate in value. Everything else can conceptually be thought of as expenses with differing properties. Some require a large initial outlay that depreciates over time, others are small, recurring payments. Usually it’s some combination of the two.

Almost everyone classifies their house as an asset, but I think that’s a misnomer. A house requires constant maintenance, repairs, and upgrades. Just looking at the individual parts that make up a house, I think it can be pretty clearly seen that the contents either lose value, or stay the same (excepting antiques or other limited, collectible items, which people have very few of anyway). There’s certainly no appreciation going on. The thing that does appreciate is the land the house is built on. This is one of the reasons why a 20 year old high-rise condo apartment is usually worth less than a 20 year old house that both had the same value initially. The condo cannot be torn down and rebuilt, each person only owns a portion of the land that the building sits on. The land underneath a detached house is like gold though – you can always rebuild the aging, “depreciating part” of the land/house combo.

Going down the list, I think at this point most people realize that a car is definitely not an asset. It’s one of the worst offenders in terms of large initial outlay and large recurring payments versus useful lifetime. The strange thing is that even though this is obvious, there are still so many people around my age (plus/minus a few years) spending lavishly on BMW, Mercedes-Benz, Lexus, Infiniti, Acura, etc. cars. Off the top of my head I can name at least 5 people I know or know of who have done something like this. Within 5 years, at least 33-50% of their original purchase price will be lost to depreciation. Add to that the cost of insurance, gas, maintenance, repairs, traffic tickets, etc., and it makes less and less sense.

Now there’s of course something to be said about enjoying your youth, “you’re only young once”, yadda, yadda. And I agree to a certain extent. Given the choice of only one of these two scenarios:

  1. Spending recklessly and enjoying years 18-30, then working like a dog the rest of your life to pay off your debts; or
  2. Working like a dog in years 18-65, saving up enough to spend recklessly in years 65+, but leaving most to your offspring

I’d choose the first one any day. But I think these are two extremes, and most people are scared of the second one because that’s the trap their parents fell into. So they lunge head first into the first scenario instead, vowing not to repeat the mistakes of their elders.

I think there can be a balance between the two though; something along the lines of working hard (though not killing yourself) from 18 to 35 to start yourself off with some sizable seed capital, then “coasting” in the sense of managing your investments wisely. Doing the latter is not likely to be as time consuming as a full time job, and if you do it right, it shouldn’t be as stressful either. That leaves the better part of each day for you to do whatever it is that you want, free of the daily grind.

The trick is to partition your time from 18 to 35 appropriately to maximize your starting capital. Some portion of that will be education, some portion in the workforce. That’s one of the reasons I go bug-eyed when I hear of friends planning to spend the next 5-7 years adding to their education before starting work. Some will even come out tens or hundreds of thousands in debt. I don’t think I could stomach that kind of cost without a large enough payoff. Most will eventually make more than their peers on an annual basis, but in total terms, it pushes their whole timeline forward at least 10 years, much more for those with non-forgivable debts.

I’ve written before about how after graduation last year and starting full time work I became disillusioned. In terms of timeline it was looking more and more like I would follow the path of my parents, albeit owning slightly nicer stuff along the way. Well screw that. This is the new plan, wish me luck.

One Comment

  1. Edwin Liang says:

    Sounds like there’s a shiny new car in your immediate future.