When Do you Decide You Can Afford A Ferrari?

Play your doomsday scenario one step further. If the bubble has a mild pop, the 100% equity business weathers the storm and survives. The levered firm goes bankrupt with the builder losing some money and the bank making the loan losing even more money. Your strategy makes sense.

What if in your doomsday scenario the fires from hell take over the earth while the Chinese stomp on the graves of fallen US citizens? Now both firms go under. The guy with 100% equity loses everything he invested. With the levered firm, the bank making the loan takes the biggest hit and the investors get away with smaller loses. You would rather be levered!

Moral of the story, for a successful businesses or a very unsuccessful businesses you want to be levered. Optimal capital structures can be mathmatically calculated for any level of risk you want to assume. 100% equity solutions are are in the great minority.

The schools I went to taught me that the rules of big business apply to small businesses also, the only diffference is that the translation is less literal. We studied companies of all sizes. Companies reach IBM scales by following the same disciplines on the way up. The others never reach that size because they behave as mom and pop operations and limit themselves from becoming anything more.

 

The problem here is the arguement is about NET WORTH.

The leverage hound are talking about NET EARNINGS.

The guy I was speaking of lived in a co-op on Park Ave, cost about $10,000,000. He had to pay taxes, maintence fees, servants, chefs, his wife had a few million in jewelry, at least another million in fur coats, exotic 5 star vacations with $1,000+ room bills.

His net worth at death would have been a lot higher had he lived over the bodega in Harlem and stayed single, so I estimate he SPENT $40,000,000 in the 35 years I knew him. So if he had saved that $40,000,000 and made compounded interest he'd been worth $200,000,000 at death probably.

Net worth is what everything is worth RIGHT THIS SECOND, net worth takes into account your lavish lifestyle deductions.

 

If mom and pop retired with $5,000,000 in 1996 and the hotshot has three bankrupties to his name, who won? When you are small you have to borrow to grow, but eventually you reach a size that you are comfortbale with handling. Could you open satalite locations with managers using debt, YES, could these people ruin you, YES. Many self made people are not comfortable getting too large, because of debt. Every business owner has to ask themselves "can I live on the $150,000 I am making now or should I throw it all on red". I had debt in my business, but it was never money I could not pay back IMMEDIATELY. If I borrowed $50,000 I had that much in my checking account and just wanted to keep it for other things at the moment, worst case scenario I could pay the loan off in a minute. I kept a limited amount of debt because of payroll issues in the off season, but I NEVER went to bed not having a positive balance of equity to debt. You think that is thinking small, ok, fine. My thinking has assured me I will never starve, to me that security is worth more than going for the Enzo.

 

Huh? The way you improve your Net Worth is by maximizing your Net Earnings each year and making smart investment decisions. No one here has suggested squandering those earnings on a lavish lifestyle other than yourself. At this point I think you are only arguing with yourself.

Let get back to talking about Ferraris and apply these theories. I own a '98 355 GTS and a 2003 Ford Expedition. Many will argue that the Ferrari is 'lavish' or a 'toy' and should only be paid for with cash. On the other hand most people thinks its OK to finance the Expy (lets ignore the no debt folks for a moment, as they would have you riding a bike to work before you take out a car loan).

I've owned the Ferrari for about 1 1/2 years and paid about $7K for maintenance, tires, oil changes, etc. I made a good buy, depreciation would be $0-$5K, depending on how fast I wanted to turn it.

I bought the Expy more recently, but lets assume I bought it about 2 years ago to make the timing roughly equivalent. 2 years ago this could have been a new vehicle. Estimated depreciation over that time, about $18K! Thanks to employee discounts and high gas prices, used Expys with high mileage like mine will go for $18-$20K. The vehicle sticked in the mid $40s and probably sold in the high $30s.

If **** hit the fan and you had to liquidate, you could sell the Ferrari and pay off your loan. If you had to sell the Expy, you'd be upside down. Which one would have been the better financial decision? Which one was a safer loan to take out?

 

you can't take it with you. spend it.

 

IMHO, you can afford a Ferrari when you can bear BOTH the pecuniary ($$) costs of maintenance and the non-pecuniary costs (psychological costs) of 'breakdown anxiety'. The initial outlay is only part of the issue. Any idiot can figure out if s/he can afford a $100-150K car -- just imagine it's a condo, you have or don't have cash, you have to make payments out of your salary.
What's far more elusive, however, is the burden of the unexpected pecuniary and non-pecuniary costs I mentioned above.

The unexpected pecuniary costs are visible in the 'jaw dropping' observed among clients who pick up their ferrari after the 30K maintenance, cracked exhaust manifolds, failed cats, befuddling electrical problems. In the last 18 months on my pristine 98 355 F1 spider with 15K miles, I've been handed four $5K bills. Can I afford it; let's just say I did deep.

The unexpected non-pecuniary costs crop up when you're thinking of taking a long distance trip in your ferrari vs. your BMW or Porsche. A long trip in the Ferrari almost inevitably invokes 'breakdown anxiety', with the strong reality you'll be stuck in a motel somewhere, with no one able to fix the car. No such worries regarding my BMW or Porsche. Or, there's the worry of dents on your buff queen when all you want to do is drive the Ferrari to a movie or restaurant somewhere and park the thing, unmolested.

My pecuniary and non-pecuniary threshold hasn't quite yet been surpassed, but it's damned near. The pedigree, the look, the thrill of driving, the sound still have my by the b's. Yet, I admit to friends that my purhase of my 355 is the most irrational thing I've ever done in my life for the reasons I note above. Plus it depreciates $10K per year. The initial cost is nothing compared to the angst I've felt over the aforementioned items. IMHO, that's my take on the affordability issue.

Cheers, Shawsan

 

If you need to put that much thought into justifying the "purchase" you probably should not by the car. The purchasing of a ferrari should include the calculations of your service and your majors. It's just not a 100-135k purchase. This purchase is solely for YOU and only YOU. Don't get rid of something in order to justify this purchase...

PASSION IS PRICELESS....

Enjoy and goodluck...

AHO

 

i wonder if it would just be wiser to rent a 360 for X days a year...................beat the living **** out of it and send it back.

 

Y'all are too analytical.

I had my epiphany when I financed a new MR2 Spyder (third car in a two car family) for $25K. Sold it three years and 8,000 miles later for $18K and paid off the balance of the loan. Realized I could've financed a 308/GT4/Mondial for the same price and put the $$ into maintenance instead of depreciation.

In fifty years, every one of you will be dead except for a few drooling senile exceptions. How will you be remembered? "Granpa left us $x when he died, poor uptight bugger," or "Granpa left us ($x - ferrari maintenance) when he died...did I ever tell you he was the one with the Ferrari?"

Yes, that's shallow, but so am I sometimes...

 

Well said.

Besides, the heirs can work themselves just like I am doing now.

The only offspring that gets something out of me when I die are going to be the ones that are worth it, and they prolly won't need it in the first place. The rest gets blown by me.

 

I can't afford it....but I buy it anyway. Life is too short.

 

me thinks that a good rule of the thumb , is when you can pay cash for it
(not saying that you'll actually do so) and still have money left over for
maintenance.

if you can , then you're 'somewhere in the bracket' already. After
that, whether you actually take the plunge or not , are totally
personal factors.

this issue is something I've laboured over for a while too. But whether
you do get it or not , you can 'bask' in the fact that since the
serious thought of getting an F-car is in your head , then you've
probably attained a certain level in life and for that , give oneself
a good pat on the back.

cheers and nice thread.

 

When you can pay cash for it.
Steve

 

Interesting post. A couple of thoughts:

Ferraris vs. boats vs. planes. My father owned sailboats and I used to fly. Cars are *cheap* to run and fix in comparison. I'd love to sail again but a family-sized sailboat is way over the horizon for me. "Break out another thousand". LOL And not only are planes hideously expensive to own and operate (the insurance alone is brutal), there is the whole issue of whether I would fly often enough to be a safe pilot.

Cash vs. Debt. Best of both worlds for me: I am happy to carry low cost, interest only mortgage debt but I borrowed less than 50% of the purchase price. I get the interest deduction, I keep my payments low, and I have access to the equity should I need it. That said, I believe in paying for toys in cash. I suppose if I bought a boat instead of a beach house I would finance that, but I wouldn't be happy about it.

Convincing the wife. Of course you can! You just have to buy the right car. I have explained to my sweetie that an eight year old, low mileage 456 would cost no more than a middling Benz or Bimmer. It was $250k out the door and some other schmuck got to eat the depreciation. So: it's not just a car, it's a BARGAIN! QED, dudes.

Ronbo

 

You can afford it when you realize your own mortality.
Instead of saving for heirs, I'm enjoying the fruits of my labor so to speak...

 

[QUOTE=shawsan} In the last 18 months on my pristine 98 355 F1 spider with 15K miles, I've been handed four $5K bills.


$20k in bills in 18months!!, What went wrong? My 95 355 I have owned for nearly 2 years now and apart from brake pads and oil change I have not had any problems with it. Of course I bought if from a Fchatter so I knew it was very well looked after and sorted. Were did you buy your car? Did you get a PPI done?

 

I concur.... Better for you at tax time.

 

Geeze Paul,

Why not just buy some tools a learn to fix it yourself?

 

We have a joke in our family regarding my efforts at fixing things around the house -- for which I have a pretty good range of tools. My efforts are referred to as "Paul's new age carpentry" which specializes in techniques to cover over and hide my mistakes -- which tend to be numerous. "Paul's new age auto" could be the death of me, so I'm trying to delegate quality work on things like my cars. Admire those who do their own work and may get there someday. Cheers, Paul