A 38-foot trawler costing more than annual earnings can still be affordable when net worth and cash flow provide a cushion. The key test is whether spending the purchase amount would meaningfully change life, framed as burning the money in the middle of the floor. If life would not change, the purchase can be made even if the price looks reckless compared with income. Using income alone can lead to unnecessary taxation of finances for depreciating assets. Using net worth without a cushion can damage retirement timelines. A realistic example compares a $100,000 boat to a $3 million net worth and evaluates affordability through the burn test and long-term compounding.
"“the reason that the decision makes sense is the other rule that you used is, if I burn that much money in the middle of the floor, would my life change? And the answer is no.”"
"“if we were doing it off your income, you know, we'd be going, okay, $100,000 if you burn that.” Then he gave the caller the go-ahead anyway: “I would buy that boat. Yeah, that's what I would do if you want a boat.”"
"“Picture stacking the purchase price in cash and setting it on fire. If your financial life genuinely does not change, the purchase is affordable regardless of how it compares to your paycheck.”"
"“You could burn three grand on the table and you'd be like, all right, that stinks, but I'm gonna be just fine.”"
Read at 24/7 Wall St.
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