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|Subject: Re: Ten Mental Exercises Leading To Freedom||Date: 3/29/2000 11:38 AM|
|Author: intercst||Number: 7104 of 864625|
Mental Exercise Nine: Determine the "Lifetime Cost" of Each Budget Item
Not surprisingly, even Warren Buffett does this.
The book Buffettology contains an interesting anecdote on Buffett's car buying habits. It goes something like this (I loaned my copy of the book to somebody, so I can't quote the exact figures):
Warren Buffett buys used Mercedes sedans and keep them about 10 years. Someone asked, "Why don't you buy a new one, you can easily afford it?" To which Buffett responded, "I don't want to pay $200,000 for a $50,000 car."
The analysis goes something like this:
New Mercedes = $50,000
Used Mercedes = $30,000
Savings = $20,000
Warren earns a long term 25% return on his investments, so $20,000 x 1.25^10 = $186,265
The 10-Year opportunuty cost for buying a new Mercedes is close to $200,000.
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