Rich Is Flashy
By Kevin Estes
Wealth Destroyer
Few things destroy wealth faster than trying to look rich.
Conspicuous consumption is the purchase of goods or services for the specific purpose of displaying one's wealth.
Common examples include a:
mansion,
luxury SUV, and
fancy boat.
Mansion
Good news! Paying back a loan isn’t an expense.
It’s more like moving money from one pocket to another:
from cash
to home equity.
Paying off a loan has no immediate impact on net worth.
However, home expenses add up:
interest,
property taxes,
utilities,
repair / maintenance, and
homeowners insurance.
5.5% Interest
The cost to borrow money is an expense.
The Federal Reserve reported the average interest rate for a 30-year fixed mortgage was 6.88% the week of 4/11/2024. (See “Sources” at the bottom for more detail.)
With a standard 20% down payment, 80% of a home purchase is financed. Interest costs about 5.5% of the home value (6.88% * 80%).
1.1% Property Tax
According to Business Insider, the effective property tax rate ranges:
from 0.29% in Hawaii
to 2.47% in New Jersey
The national average is 1.1%.
1% Utilities
Common utility expenses include electricity, natural gas, water, sewer, cable, phone, security, garbage, and recycling.
Forbes estimates the average American household spends $429.33 a month on utilities. Costs vary by the:
location,
size, and
energy efficiency of the home.
Nonetheless, a decent estimate is $5,152 a year ($429.33 * 12 months).
As of the end of 2023, the average price of a house sold in the United States was $492,300. (See “Sources” for more detail.)
That puts the average utility expense at about 1% of the home value each year ($5,152 / $492,300).
1% Repair & Maintenance
Upkeep costs also vary. They tend to be:
Higher in the first few years, as the home is personalized.
Lower for some years since it’s new and may be under warranty.
Higher as the home ages and needs major repairs and upgrades.
However, 1% of the home value each year is a decent estimate.
0.3% Homeowners Insurance
According to Forbes Advisor, the average homeowners insurance was $1,678 for April 2024 for a $350,000 policy. Land usually isn’t insured.
Let’s assume 0.3% of the home value each year ($1,678 / $492,300) for homeowners insurance.
Nearly 9%
Altogether, the annual expense of a home might run 8.9% of its value:
5.5% interest
1.1% property taxes
1.0% utilities
1.0% repair and maintenance
0.3% homeowners insurance
That excludes the expense of buying and selling the home. Switching homes often is a great way to build wealth… for realtors, brokers, loan officers, home inspectors, title insurers, notaries, insurance agents, etc.
8.9% comes to:
$17,800 for a $200,000 home
$44,500 for a $500,000 home
$89,000 for a $1,000,000 home
$178,000 for a $2,000,000 home
It raises the question: Is a Home an Investment?
Luxury SUV
A Mercedes-Maybach GLS 600 stopped next to us the other day on our way to practice.
We were in the 2014 Ford Escape my wife and I purchased in September 2013 for about $17,000.
The Mercedes-Maybach currently has a Manufacturer’s Suggested Retail Price (MSRP) of $174,350.
Our families received the same primary benefit: transportation from one location to another. Our mobile living rooms are similarly sized. We were stuck at the same traffic light.
Sales Tax vs. Purchase Price
The sales tax in King County (where Seattle’s located) is over 10%.
The owner of the Mercedes-Maybach may have paid more in sales tax than we did for our SUV!
Last a Century?
We’ve owned and driven our Escape for over a decade.
The Mercedes-Maybach is roughly ten times (10x) as expensive as our Ford Escape. For the annual cost to be similar, the Mercedes-Maybach would need to last over 100 years!
How many generations of drivers is that?
Will it look like this to those alive then?
By the way, we were fortunate to make it through the next light.
The Mercedes-Maybach wasn’t.
Fancy Boat
Our family loves the water! We watch a sailing show together almost every week.
My daughter and I started sailing during the pandemic. (My wife doesn’t, as she gets motion sickness.)
We’ve sailed the San Juan Islands twice. Last summer, we were fortunate to earn American Sailing Association certifications.
Here’s a picture I took at Roche Harbor halfway through the trip:
However, we’re not buying a boat anytime soon!
B. O. A. T.
The cost of ownership really adds up:
initial purchase
repair and maintenance
marina (moorage) fees
insurance
utilities like electricity, gas, oil, and cell service
It’s like owning another house!
Did you know BOAT is an acronym? It’s stands for:
Bust
Out
Another
Thousand
Some say the second happiest day of their life was when they bought a boat.
The happiest? The day they sold it.
So Glamorous
Think sailing is posh? One marina shares amenities with an RV park.
Showers are few and far between. When available, they’re often coin operated. Pro tip: bring quarters!
Every few days, you need to pump out. For the uninitiated, think of a sailboat as a floating porta potty.
This is the best case scenario! Worse things happen at sea.
Still, we love it! It’s like camping on water.
Flashy vs. Boring
Flaunting money is like fireworks - an exciting way to blow wealth!
Real wealth is boring. It quietly toils around the clock for its owner.
Instead of buying things, the wealthy invest in businesses. For more, check out: Own Like a Billionaire?
I hope this helps!
If you’re interested in a review of your specific situation…
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.
Sources
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, April 11, 2024.
U.S. Census Bureau and U.S. Department of Housing and Urban Development, Average Sales Price of Houses Sold for the United States [ASPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ASPUS, March 27, 2024.