From Common Sense to Wealth

Money saving strategies can be highly potent wealth drivers.

For example, our blog posts have highlighted this in terms of buying index funds rather than managed funds because the annual fee differentials can halve an investor's lifetime wealth accumulation.

On the topic of saving, we also recall that Warren Buffett once said he thinks about spending money: Before buying something -- any frivolous item or depreciating good -- he thinks about his foregone interest accumulation as a result of spending the money. Instead of buying a $10,000 watch, he's recall that investing the money in stocks would normally allow him to clip annual coupons of $1,000 a year into perpetuity. Put another way, a saver would remind himself that the same $10,000 invested in equities has typically accumulated to $11,000 in year 2, $12,100 in year 3, roughly $20,000 in year 7, $40,000 in year 14, and $160,000 at the retirement age of a 37 year old (in 28 years).

It also makes sense to consider the long-run carrying cost of any asset before purchasing it. The $10,000 carrying cost of a second home equates to $200,000 sunk cost after 20 years, assuming zero inflation.

Along the same lines of thinking, we loved the short article by Scott Burns on AssetBuilder.com about the compelling economics of saving on carry-cost, titled Pruis at Five. It highlights another way to consider the real asset value of a dollar saved (in bold):

• According to the trip meter on our 2003 Prius, my wife and I have covered the last 2,200 miles at an average of 46.1 miles per gallon. That’s pretty typical of the mileage we’ve enjoyed since buying the car five years and 62,800 miles ago....

  When we bought it, our expectation was that it would cut our gasoline consumption by about 500 gallons a year, saving us $750 a year based on the $1.50-a-gallon price of gasoline at the time. (Those were the good old days…) If gasoline prices rose to $2 a gallon, as many expected, we might save $1,000 a year.

  Figuring $3.20 a gallon---well below the current national average price of $3.39--- the Prius is saving us about $1,600 a year of after-tax income.

  It’s interesting to look at the $1,600-a-year savings in terms of what you’d have to invest to enjoy the same income. An investor in the 25 percent tax bracket buying a 10-year Treasury obligation, recently yielding 3.76 percent, would have to invest $56,738 to get the same net cash benefit. At the end of the ten years, if inflation averaged 4 percent, his original investment would have lost about a third of its purchasing power, providing more depreciation than income. More important, he wouldn’t have had transportation.

  We figure, by the way, that we saved the $3,500 cost of a replacement battery in the first 30 months or so of driving. The battery, like the rest of the car, is doing fine. So a big “yes, but” question is behind us.

  The Prius, over the same 10-year period, will depreciate more than a Treasury obligation--- probably about 70 percent--- but it will also have provided actual transportation. According to autotrader.com the recent average offering price of the 49 used 2003 Priuses for sale in the entire country was $14,309. The NADA value for a clean retail car is $13,600. That’s dirt cheap for five-year depreciation.

  ExxonMobil shares were recently selling at $94 with a dividend of $1.40 to yield 1.49 percent. Since the dividend is taxed at 15 percent, you’d have to own 1,344 shares to get the same spendable income benefit that the Prius is now providing. That means you’d have to invest a whopping $126,386 to “produce” the income benefit of a 2003 Prius. As energy guru Amory Lovins has pointed out relentlessly since 1973, the cheapest way to produce more energy is to use it more efficiently. Sounds like a plan to me.

  Which brings me to the future.

  There have been rumors that the 2009 Prius will be a plug-in car with enough battery power for short commutes. Instead of refilling the gas tank, drivers will recharge the car at night, reserving the gasoline motor for highway trips. Problems with the development of more powerful batteries, however, appear to have delayed the plug-in and its potential to achieve 100 mpg.

  A car like that… well, it could get us to think trade-in.