An even starting point
If you read our last article on how much boat you can afford, you will already know my position on borrowing money. What you may not know, is just how much money boat loans will cost you. There is a reason why banks have such large buildings in high rent city districts. Boat loans and most other loans for that matter put your money to work for the bank. Take back your hard-earned money and make it work for you instead.
So let’s make up a not-so hypothetical comparison. Jack and Jill came back from the hill with the pail of water to find a letter in the mailbox saying that their recently departed grandmother left them what was remaining of her estate to divide 50/50 between them. They spent countless hours atop the hill looking out over the bay watching the sailboats play. They decide they want to use this windfall to get their own sailboats.
Diverging Paths on Boat Loans
Jack decides to take the 15k and walk straight down to the marina and slap it down on the desk. “I’ll take the red one please, what is the monthly payment?” The salesperson happily takes the deposit and signs Jack up for a twenty-year note paying $700 per month on a $150k yacht. Jack can swing it, but its a big chunk of his take home. He then signs a slip agreement and insurance policy with the same dealer for a bargain of $500 per month and guarantees priority service at the marina. He is psyched and runs back to tell Jill all about his new joy.
Jill got her check and sat and stared at it for a few days. She wanted a boat as badly as Jack all these years. But, something in the back of her head was telling her to be prudent and spend the money wisely. Jill takes the money to her local fiduciary and invests her money in a few reputable mutual funds with proven track records while she mulls things over. She wants a boat badly but wants to make sure she gets the right boat. She sees Jacks new boat and loves it, but is still not sure. She figures she has waited this long, there’s no point in hurrying.
A few months later, Jill still has not made up her mind. She sees jack a lot more than she expected given he has a new boat. She asks about it. He confides to Jill that he loves the boat, but wishes he could afford to use it more often. The cost of the payments and marina fees eat up most of his disposable income. With the price of fuel being so high and the bathroom toilet the sprung a leak at home, he can’t afford to use the boat as often as he wants to and is afraid of the cost of maintenance if he uses it too much.
This solidifies Jill’s apprehension to jump into the world boat loans. On top of this, a few months have gone by and the markets have been good. Her mutual funds are well outpacing the index funds and are on track for a 15% annual return if this keeps up. She’s also decided to test her budget to see if she too could afford a boat. She’s been putting the same $700 plus $500 per month into the mutual funds, that Jack had told her he was paying for his boat. It’s only been 4 months, and her initial gift of $15k has grown to nearly $20k with her added deposits and interest. She’s getting excited about the growth of her money. Jill decides with her money growing this fast, she can wait a few more years. She gets to have some fun now and then with Jack anyway.
The Future is Bright, for Jill…
Fast forward six years into the future. Jack is still making his monthly payments on his boat loans and still not getting to use the boat as much as he would have liked. In fact, the boat is looking a bit shabby because he could not afford to keep up with the waxing. He thought about selling the boat, but he is so upside-down on the loan that he would have to take out another loan just to pay off the boat loan. He’s making it, but the boat is has become a burden and he rarely even uses it. It’s not so nice to look at anymore and it reminds him of how much money it’s costing him.
Jill, on the other hand, has flown out to the international boat show. She’s climbing through every boat on the water and getting a feel for the differences in each one. She’s unwittingly saved the best for last. Her jaw drops when she boards the last boat. Trying not to blow her cool with the salesman, she starts to talk the boat down a bit and begins the negotiation. She’s armed to the hilt with knowledge, a pen, and a checkbook. She’s able to talk the dealer down to $150k dangling a check in front of him for a bigger and fancier boat than Jack got just a few years ago.
To put a cherry on top, Jill’s little nest egg has grown to not just $150k, but with the ups and downs of the market, her investments averaged a 10% return and she has a nest egg of about $175,000. She’s gotten comfortable with the payment she was making and decides to keep it. She’s also learned to do the same with her cars and everything else she buys so here disposable income has grown as well over these last 8 years. In fact, she’s been blogging about her journey and her blog income is more than enough to pay her living expenses and build a retirement fund. She decides to hire a rental management company to rent her house for her. Then, she sells her car and has her mail forwarded to Jack’s house. She’s decided to skip the slip and sails off to French Polynesia with her new boyfriend in her paid-for yacht.
The Maths
This is not a far fetched fantasy. This is some pretty basic math and a whole lot of discipline. Here is a graph showing the “net worth” of these two decision trees side-by-side over 10 years.
This actually assumes Jill pays for slip and insurance and keeps putting the $700 in the mutual funds.
Jack starts out with the exact same $15k and monthly expenditure. However, by the time Jill has bought her boat with cash, Jack has paid the bank $60k and still has another $116k to go. This is the power of compound interest and the servitude of debt service. Even a 0% loan, not that your likely to find one for a 20-year term, can’t match the 10% return from the market (historically the DJI has averaged over 9% including recessions).
Are the six years worth it? Stay away from boat loans, all loans for that matter, to build wealth.
