Video: Does a Ferrari Make You Rich?

Watch on YouTube: Does a Ferrari make you rich?

My son Matthew talking about Ferraris. They might make your “feel” rich, but they won’t actually “make” you rich.

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Video Transcript:

Hi! Welcome back. This is Matthew from A in Finance.

I had a book report and a test this week, so I’m a little late in getting this video done. Anyways, today I want to tell you about a story that came up in my karate class.

My Sensei , Sensei Barry – that’s him on the right. Well, he likes to talk a lot and tell us really long stories to teach us lessons during our karate classes. Anyways, he started talking about how his brother-in-law was a millionaire. Then my friend Kyle jumps in and asks, “Ooo, does he have a Ferrari?”

My Sensei says, “No, of course not. He doesn’t waste his money on stuff like that. He teaches at a college and makes a normal salary and drives the same old car that he’s had for the last 12 years. You know what he does? Instead of buying stuff, he invests all of his money in real estate. That’s why he’s a millionaire.”  I forgot what point Sensei Barry was trying to make in karate class, but I did get the financial lesson.

After class, my dad asked me, “Do you know what a Ferrari is?” I said, “Yeah, it’s a really cool car. I think I’ve seen it on some YouTube videos.” Then my dad says, “But do you know how much a Ferrari costs?”  I said, “I don’t know. Are they like $100,000 dollars?”

My dad says, “No way man. Some of them cost over $1 million dollars. And the more ‘reasonable’ ones may cost you ONLY about $240,000 dollars.”

“What?!,” I said.  “That’s crazy. How can any car be worth that much?” With $240,000 dollars, I could buy 800 Xboxes .  I don’t need that many, but I could. Or I could buy a bunch of other things that I want like a laptop or an iPad.

Then my dad says to me, “Yup, a Ferrari is a really sweet car, but it costs as much as a house. So would you trade our house for a Ferrari?”  Then I said, “How could we live in it? It t has no bathrooms or anything.” To that my dad chuckles and tells me that I could just go “in the wild,” like I did when we went on road trips when I was 5 or 6 years old.  Anyways, I wouldn’t trade a house for a car.  Then I ask my dad, “What’s the fanciest car you ever had?”

He tells me that before I was born he bought a Jaguar sports coupe like this one. He bought it because he never had a fancy car and wanted one before he had to get a minivan. After that, my dad said he realized that he just wasn’t a car-guy. He said that he likes when his friends get new cars, but he doesn’t like buying them for himself. Instead new car payments, he’d rather invest his money.

Then I said, “But didn’t you make money when you sold your car?” He said, “Nope. When I sold it, I got less money than what I paid for it. I didn’t lose that much because I bought it used, but I still lost money because a car is what you call a ‘depreciating asset’.”

He says that a car actually loses its value over time, unlike a house that builds value. A piece of real estate increases in value because land is a limited resource and there’s only so much to go around.  But a car is like a piece of equipment that just gets older and wears down.

I said, “so is it like the old Mac that Uncle Andy gave us a long time ago that we never use because it’s sooooo sloooow?”

My dad says “Exactly. That’s why mom keeps nagging me to bring it to a recycling center.”

He also tells me that a car has some special depreciation too.

He says that as soon as you drive a new car off the lot, it loses 11% of its value. That’s because people pay an extra big “premium” for a brand “new” car. And once somebody buys it, it can never be resold as a “new” car, even if you drove it off the dealer’s lot and immediately changed your mind and turned around to return it.

And after 5 years, it loses 64%. That’s a lot to pay if you buy new cars every couple years. But my dad tells me it’s OK if you own your cars a long time because then it spreads out over several years and it loses less value the longer you own it.

So what if you bought a Ferrari? Let’s say you bought the “cheap” one for only $240,000 dollars? You lose $26,000 dollars on day one. And $153,000 dollars after 5 years. Now that’s really a lot of money.

So my dad tells me that if something always loses value, he doesn’t think of it as a real asset. My dad says only things that make you money are “real” assets – things like stocks and real estate.

For example, Starbucks is one of my dad’s “forever” stocks – something we’re holding forever. If you invested your money in Starbucks instead of buying a Ferrari, that $240,000 dollars  would be worth almost $863,000 today.

You see, instead of sucking away all of your money, things like stocks give you an opportunity to make more money in the future. That’s what real assets are.

Anyways, the lesson is that buying a flashy car might make you “feel” rich, but it doesn’t actually “make” you rich. Only real assets, like stocks and real estate investments, can make you rich because they grow more valuable over time.

But, I have to admit… I DO look good in a Ferrari.

Anyways, thanks for watching.  Hoped you enjoyed it and learned something.

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And look out for another video next week.

Thanks. Bye bye.