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Careful Chasing Shiny Things!

Updated: Sep 15, 2021

I was at one of those leadership management courses in Banff 10+ years ago with a group of co-workers. One of the exercises was to share an experience about someone you looked up to and who inspired you in your life. We had to highlight a quote or a phrase they said that stuck in your mind over the years, and how it impacted your future decisions and behaviours. We all gain inspiration and perspective in different ways and means throughout our lives, and I’ll always remember one specific story shared from a person in this group.

The person was a casual friend and coworker of mine, and I would learn a couple things about him I never knew. He was from a farming community in central Alberta, and he had seen many hardships in his years of growing up. Many of those hardships were brought on by quick and abundent money from the boom-and-bust oil industry in Alberta. He valued hard work, a full days’ pay for full days’ work, sweat-equity, and his father (now retired) was in the banking profession and responsible for loans. Fast-forward 10-15 years and the oil industry is struggling in this area.. The oil wells may as well be water wells, but many producers cannot afford to shut them down, so they attempt to trim costs with technology, decreased maintenance cycles, and periodic lay-offs. He had seen many people lose their primary source of income over the years and not be able to service their farm debt. The debt they accumulated when times were good. Inevitably, they lost assets and the equity they had built through foreclosures or selling under duress, and usually at a significant loss. Many of the assets these people had were bought with loans, and a majority were not appreciable assets. In fact, they were highly depreciable assets. The kind of assets that lose 25-35% value as soon as they are bought on credit; like holiday trailers, boats, quads, cars, trucks, motorcycles, etc.... The immediately depreciated value in these items generally respresents the high borrowing costs, which lenders make certain in their loan formulas that you pay for and never get back.

His Dad (the banker) told him at a young age, “Don’t chase shiny things!”, which to my association is a version of “Don’t try to keep up with the Joneses!”. This particular phrase and his Dad’s unique perpectives in life stuck with him.

I’m sure everyone has fallen trap to the lure of “shiny things” in their lives? We probably still give in to it at times, and I’m no exception. Even today, I have to resist the annual upgrades for apple products and buying new clothes before wearing out the old clothes. In my early working career I had bought many (depreciable) things on credit with the minimum downpayments. This included a brand, new 32’ holiday trailer with slide-out and a 1 ton Chev Crewcab 4x4 to pull it around. Fortunately, I was able to pay the debt, but I often reflect on how this might have been different if I lost my earning power. We moved overseas for work and experience at one point a few years after this purchase, and sold most everything we owned including the truck and trailer in a whirlwind of garage sales and marketplace postings. I remember losing a lot of money on the truck and trailer transactions, to the tune of 40-50% in just a few years.

In the town I used to live in, there was literally one holiday trailer parked at every 3rd or 4th house. They would get pulled out of storage in mid-May, serviced, and sat at peoples home’s in their driveways or out front on the street for 90% of the Canadian, snow-free 4 months. I guessed (by my own experience and observation) they were used an average of 2-3 weeks per year by most people who owned them. I mean, don’t get me wrong, some have uses above this average e.g. for business or life, ... but I'd argue the majority don’t. I was one of the casual camper types, keeping up with the Joneses, and maybe used it a week or two a year. For the most part, these trailers are pleasure use only and for people who don't want to rough it in a tent. They want all the luxury's of home while "camping"..

Being a data driven guy, I worked it out one day. What does it really cost and what would it take to justify a new holiday trailer? Let’s say you bought a upper-end 32’ holiday trailer for $45k and were lucky enough to get today's prime lending rate of 2.45%, even though the average loan interest for RVs is 5-6%. So,... you took out a loan for the $45k with the standard 10% or $4.5k downpayment and survived all the loan stress tests for your RV (e.g. your credit score is 600-700+). ( The average term for RV loans is 10-20 years because, of course, banks profit on the interest generated from your loan term. Plus YOU really WANT this SHINY THING NOW, and YOU WANT TO PAY AS LITTLE AS POSSIBLE every month. This is the immediate gratification hook of “percieved savings”, e.g. the longer I stretch this loan out, the more I save per month in expenses? So, let’s say you took a 15 year loan out. In the end, once the smoke from the math clears, you will have paid $4.5k (10%) of your own hard-earned savings to secure your $45k loan, borrowed $40.5k from your lender after your downpayment, and will pay total of $48.5k over the 15 year loan term. The monthly payments will be $270 for 180 months, and include approximately $8k (16% of the total) in loan interest costs. So, in effect, you assumed the downpayment plus the interest, or $12.5k, or 26% in total borrowing costs. Remember the depreciation cycle? Your asset just depreciated 26%, and you haven’t even used it yet!

But wait, the question was, “what does it take to justify a holiday trailer”? So, it cost you $48.5k for 15 years. A nice hotel room or get-away cabin costs you $100-150 per night. Your $48.5k would have bought you 485-323 nights total in comparable accomodations, or 21-32 nights per year for 15 years. And this is not taking into account the future value of $48.5k invested and working for you. Also, you pay as you use it with hotels, whereas with trailers you pay whether you use it or not.

Hold on though, ... I forgot, what am I going to pull that trailer with and transport my family? I need a big truck with lots of seating and a tow package. For the shock factor, let’s just say you went and bought a shiny, brand new, mid-range Chevy crewcab 4x4 3/4 ton with enough power and bells and whistles to make you happy taking corners without tipping over, cut through the Canadian prairie winds, and climb the steep elevations of the Canadian Rocky foothills.

BAM!!! ... I’m in for another $75k of borrowed money, and another $22.5k in borrowing costs. My truck will cost me almost $90k for the same loan term and interest schedule, and add another $500/month in payments.

Is the math done? Hardly! You’ll need another $1.5-2k per year for insurance and storage policies, and $6.5k per year in gas costs for every 10,000 kms travelled. FYI this fuel calculation is without load and using the manufacturor’s MPG rating which doesn’t account for load, so add another 25% in fuel costs while you’re towing that 6500 pound shiny thing. Now you are up to $8k per year for every 10,000 kms of towing pleasure.

I gotta be done adding up costs now .... right? Well I guess you might be, if you are going to park in free, open spaces without any utlities or ammenities, but that is unlikely to happen often. On average, you can get a basic Canadian campsite to park your RV for $40-50 per night.... unless you’re in highly desirable areas like the Canadian parks or lakes, e.g. Jasper, Banff, and anywhere in the Okanagan ... then it can be as high as $75-100 per night for full service lots! So, let’s say you are going to use your trailer for 3 weeks a year, and burn up all your holiday entitlements on it. The other option is you use it every “nice weekend” in Canada during spring, summer, and fall, which probably comes very close to the same number of days (21). That will compute to another $1000-1500 per year in campsite rental costs.

Whew! Am I done yet? Maybe? Unless you don’t have somewhere like a farm or large RV pad to store your unit during the long Canadian winter months! This is particularily true in cities where there are strict bylaws on parking these units in front of your properties for longer than 24-48 hours, and home RV pads are not common due to zoning and spacing requirements. For unheated storage, it will run you another $50-150 or more per month. Take $100 as an average and you will generally need to store your RV in Canada from Oct1 - May1 (8 months). That’s another $800.

I could go on a bit more because you’ll need maintenance items and “stuff” to support and enhance your trailer and camping experience; like tires, sewage treatment, antifreeze, BBQs, board games, camp tables/chairs, bedding, eating utensils, propane, etc etc. Throw another $10k down for these new items for giggles and shits, and I’m being conservative!

Now let’s tally it up. My new trailer cost $48.5k, my truck cost $90k, and I assumed an additional $770 per month in loan payments for the next 15 years. Add the average incidentals of fuel, insurance, storage, and campsite rentals and you have another $10.3k per year or $860 per month if you use the trailer roughly 3 weeks a year and tow it for 10,000 kms. That’s ~$1500 per month, or the average payment on a decent home mortgage!

Furthermore, at the end of that 15 years you’d be lucky to get 15% of your sunk value back if you sold your trailer and truck together!

Anyways, at $1500 per month, I could stay in $150 per night hotels for half the year for 15 years. Back to question of “what would it take to justify a holiday trailer?” I’d say (using this formula and analogy) you need to get 6 months a year of use out of it for starters? Of course there’s the escapism and family-fun aspect of these purchases to factor in which many people say you can’t put a value on. But I’d argue there are equally, less-expensive, less risk ways of doing this? Ways to pay as you go for for family fun versus buying a recreation solution on debt that you may rarely use? There are many ways to buy experiences at face value versus these inflated and often misunderstood values?

Now, let’s assume you keep your money in the bank, use up all your unused TFSA room, and put the maximum $12k per year towards your personal and spousal TFSAs over the the next 15 years, with and average return of 6%? If you maintain this plan, and invest in basic index-tracking ETFs with dividend-reinvesting, you will be sneaking up on $500k in combined TFSA savings after 15 years, or 3X the amount of truck and trailer loan combined. Better yet, you buy the truck and trailer at cost, and save the $25k in interest payments..

Hmmmm? Worth saving towards goals versus borrowing? Of course this is one amped up version of a loan story and not everyone’s story, but the basic math and the message for people trying to get ahead financially is clear.

..... Careful chasing shiny things! .....

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