What is it that we here at Captain Finance and Warren Buffett have in common? Besides a shared interest in finances, we, just as Mr. Buffett, appreciate the value of money and want to get the maximum use from a product we acquire and own.
The Oracle of Omaha, as Mr. Buffett is often referred to, because of his incredible financial foresight, is not one for lavish spending. He prefers to eat burgers and simple dishes at his hometown diner, enjoys sodas and drives his cars for as long as they carry him safely. According to Buffett’s own daughter, it takes some convincing to get one of the richest men on earth to purchase a new car.
Warren Buffett’s new car
In fact, he only just bought a new automobile. The final price was somewhere in the region of $ 44,600 (€ 37,750/ £ 29,331) and $ 69,095 (€ 54,795/ £ 42,575) depending on what extras the car came with. He had done so after 8 years. Although his car was not cheap per se, for a Warren Buffett who is worth $ 65.8 billion (€ 54,795/ £ 42,575), that sum hardly dents his finances.
While some might associate wealthy people with a fleet of German, English, and Italian luxury cars in the 6- or 7-figure range, Warren Buffett opted for a car that many of his less wealthy peers might also buy.
Let’s take a different look at why we here at Captain Finance love his approach to money. Firstly, Mr. Buffett, just as he does with his investments, acquires only those products that he deems good value for money; such as his new car. Secondly, he keeps his possessions for a long time in order to get the most use from a product. Thirdly, his cost-to-wealth ratio, that is comparing the price of an item to overall wealth, is amazingly low. The most expensive version of Buffett’s new car at $ 69,095 (€ 64,851/ £ 46,114) would represent a tiny 0.000001 cost-to-wealth ratio. In percentage terms: Mr. Buffett spent no more than 0.0001% of his wealth on his new vehicle. That is a minuscule fraction of his financial assets.
The high car cost-wealth ratio
Granted, this type of ratio is difficult to achieve, as most of us don’t play in the same wealth league as Warren Buffett, but yet, most of us know someone whose approach to spending is the polar opposite.
We probably all know car buyers who behave very differently from one of the richest man on earth. They are willing to accept a much higher cost-to-wealth ratio. They buy mid- or high-end level cars at prices similar or even higher to what the Oracle was willing to pay.
Spend a day walking through Paris and you see just that: expensive cars. It might feel as most were billionaires, or at least millionaires. But with an average wealth of € 115,800 ($ 123,369/ £ 82,370) in France, this is unfortunately not the case.
Comparing the respective average wealth to the price of Buffett’s car of $ 69,095, the ratio is 0.56 for France. That is, buying a similar priced car would eat up more than half of your wealth. The ratios in the USA would be even higher. With a median wealth of $ 44,911 (€ 42,209 / £ 29,999), the ratio is 1.54. In other words, more than the average person has in net wealth.
The difference in how much of their wealth some are willing to spend on new cars in comparison to Buffett is staggering. In comparison to Buffett with his tiny ratio, the average buyer of a similarly priced car spends a multiple of 430,847 of what Buffett is willing to part with. But as that is based on the median wealth, many are willing to part with an even greater multiple of their wealth.
But here at Captain Finance we know that we can reduce that ratio significantly by choosing cars that are within our means and that do not eat up our financial stash.
Captain Finance’s own street ship
Captain Finance’s street ship has been with us for 8 years; and will remain with us for as long as it is in good health. When I was looking at cars 8 years ago, I was torn between a nice German luxury make and a non-luxury model. At first glance, both looked similarly priced with only a few hundred Euros difference between them. On closer inspection, I realized that the luxury make came, well, relatively unequipped. It did have a steering wheel and wheels, but lacked any of the amenities the non-luxury model offered. The two makes I considered both started at € 15,000 ($ 15,935 / £ 10,656). After adding all the equipment such as MP3 player, A/C, and cruise control, the non-luxury car was still € 15,000 (remember, it came fully equipped), the luxury model, on the other hand, would have set me back a massive € 23,000 ($ 24,447 / £ 16,346). That, I decided, was too large of a slice of my savings. Also the more expensive car suffers from a greater annual depreciation in comparison to the better priced one.
Buy your own products
The savvy financial sailor and Warren Buffett have something else in common: investing in what you believe in and what you would indeed buy. Don't pour your money into something that you were recommended. Warren Buffett bought a product from a company he is heavily invested in, almost 2% (30m shares)* of the GM shares are held by Berkshire Hathaway. That highlights that the savvy sailor only invests money in those companies s/he would happily buy a product from.
I suppose that was one of the reasons Mr. Buffett bought a car from GM. He indirectly paid himself by acquiring a product from a company that he is a shareholder of while staying true to his philosophy of avoiding unnecessary spending.