Uncensored Money Season Four: How Much Does That Prada Bag (Or Overseas Holiday) Really Cost?

Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 29/03/2023

Show Notes

It ‘IT bag’ or overseas holiday is to the 2020s what the car was to the 1980s; a status symbol. But many aren’t aware of the real cost of that status symbol and how it might be keeping you further away from your goals. In this solo episode, Mel shares 4 hidden traps you should be aware of before you book your holiday or splurge on a new pricey purchase.

Resources mentioned in this episode: 

• My Financial Focus (goal setting course) 
• 50+ Ways to Find $10k in 12 Months
• 9 Most Popular Investing Apps

If you know you need more help with your finances make sure you join the waitlist for the next round of the My Financial Adulting Plan. 

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Transcript

This season, I have been completely sucked into Married At First Sight, but the truth is I am a reality TV junkie. And just last week I had a BCC or a benign skin cancer cut out of my leg, which meant I needed to sit with my leg elevated for 48 hours. And sure I could have read a few books, but I was hopped up on painkillers, so that meant I could lean into some really good, I mean, really bad. I mean really good, you know what I mean? reality TV shows and the latest one I found was Friends of WeHo, friends of West Hollywood. It's like the gay version of the Housewives franchise. So good.

But what I realised as I was, as I was watching it, is just how much designer wear we're exposed to. I mean, even if you look at this Australian season of Married At First Sight, most of the girls carried a designer handbag at some point, whether on a date or to a dinner.

And you can be damn sure they were carrying it in Friends of WeHo or any of their Housewives franchises. You know, the IT bag, or even the Instagramed overseas holiday, I think is to the 2020s, what the car was to the 1980s. It's just another status symbol, but my concern is that this status symbol is keeping people further away from your goals and you are not aware of the real cost.

And it might seem strange that in a time of rising inflation rates and rising interest costs, I'm here talking about how much does that Prada bag really cost? Or how much does that overseas holiday really cost? I mean, are people still purchasing designer bags and going on overseas holiday? The answer is yes, they are.

And in droves, you know, sometimes it might be to celebrate a bonus or a version of, 'screw it. My goals are so far away. I deserve to be happy now'. Or 'I just need something for the 'gram'. Or, 'you know what? It's just been so hard the last few years, I deserve this'. That repetition of 'I deserve this' is really, really strong. It's a pattern I hear a lot.

Or maybe you've just told yourself you deserve it after what has been a tough year or a great year. Let's be honest, we can justify the reward for either. Maybe it's something you've recovered from. Maybe it's a new business you've launched, or maybe it's a new role or promotion you've landed.

Or maybe it's unexpected monies, like a tax refund, which kind of gives us permission to spend more on something we might not necessarily indulge in or a credit card that you've received. Again, that unexpected money. In this instance really isn't ours. But the bottom line is you want to spend a chunk of your hard-earned cash on yourself for having survived another year with your faculties intact.

Now, I'm not gonna suggest that rewarding our efforts is a bad thing. I think it's really freaking important to celebrate milestones Yes, but I also believe it's really necessary to understand the true cost of that pat you're giving yourself on the back. Or if you've simply saved, and this is something you've chosen, whether it's a holiday or an IT bag, or what your particular predilection is, that if you've done it and if you've saved for it, then to enjoy it without guilt.

But too often the thought hasn't been put into it. It's on credit, and your goals are the thing that's suffering. That's because every decision we make has an opportunity cost. You might think of it as simply acknowledging that a boozy night out brings a consequence of a morning lost nursing a hangover.

It doesn't mean you regret celebrating a night out with friends, but if you missed an important meeting the next morning, then you might have changed your behaviour or at least limited your drinks and left a few hours earlier. The same is true for our finances. If we're gonna buy ourselves these things, these treats, these rewards, we need to understand and acknowledge the unintended consequences that arise as a result of buying that for ourselves.

As I said, very similar to that boozy night out and the hangover. We're not gonna not do the boozy night out, although some of us more and more are choosing not to, but we are being aware of what are the implications of doing it. And I think it's a big step forward towards becoming conscious consumers and making informed mindful choices.

And that's what I'm all about, putting you back in the driver's seat so that you could make informed mindful choices. So if you are tempted to buy that holiday or buy that designer bag, or whatever that particular high ticket item is, what do you need to be aware of? What opportunity cost or hidden traps should you be aware of?

And I'm gonna go through four.

So number one, rewarding yourself with that pricey, Prada handbag, or an overseas trip away might sound like fun, but it's problematic if you have oodles of credit card debt, you should be paying off instead. Or if you're going to be putting it onto credit, that's because the $5,000 trip or the $5,000 bag you bought yourself in lieu of either paying down your credit card debt or you've bought it on credit that you are only paying the minimum payment on, may cost you an unexpected $12,181 in interest, and you'll still have the debt some 33 years later.

Yeah. $5,000 bought on credit. If you only pay the minimum means that you'll pay more than three times the amount and still have the debt 33 years later. That is longer than a freaking mortgage.

But let's say that even if you knuckle down and pay the amount off over two years, you are still gonna pay an extra $902 in interest on an average credit card, which for something that is going to depreciate in value or disappear in the case of a holiday doesn't really make great financial sense.

So really the first rule of thumb is if you have bad debt and bad debt is credit cards or personal loans or 'buying now pay later', you need to sort that out before you even consider buying something like this. The second is if you are going to put it onto bad debt. Again, don't. Simple. Don't.

So one is putting it on debt or not paying off debt and using the funds that you should have been using to pay off debt into buying this purchase instead. But even worse is number two, which is the opportunity cost of what you could have saved during the time that you were making those credit card repayments.

Let's say you didn't buy the bag or the holiday, and instead paid off and cut off all your credit cards, you'd free up a load of cash that you were using to pay off the interest each month, and if you then transferred, instead of making those monthly repayments that you would've made on the credit card, if you made them into a bank account earning 3% interest, you will save over $28,000 over 33 years. Now, a bank account with over almost 30 grand versus a credit card with a nil balance that you've been paying minimum payments on and nothing to show for a decades later, that just seems like a no brainer to me.

So number one is if you've got bad debt, you've gotta get rid of it. Number two, if you don't have savings, if you don't have things like that, this is the opportunity cost of buying that bag or buying that holiday instead.

But number three, you know, you might thumb your nose at a 3% interest rate and go, Ugh. Well, that's barely worth it. But if you look beyond bank accounts for a higher return, then your opportunity costs might also soar.

After all, a wise person once told me that instead of putting my money into the bank, I should consider buying the bank, by purchasing bank shares. Now, that's not what I'm suggesting here, but what I'm saying is you might be uncomfortable with shares. So you might consider an index fund or salary sacrificing extra into super or starting a property deposit or investing in one of the many FinTech solutions instead.

In the show notes, we'll put a freebie on the nine most popular investing apps. So if you love this idea, that'll give you a place to start. But the point is that if you aren't already investing, so just say you are, you're a little bit smug. You're like, Hey, I don't have any bad debt, so therefore I can buy the bag. I can buy the holiday. If you are not investing though, then the opportunity cost of buying that before you start is massive.

So if I took those repayments on that credit card, so if instead of putting that onto bad debt and putting it into, let's say shares. Something that's going to get me a return of 9% annual interest rate. After 33 years, which is how long it was gonna take me to pay off my credit card, I would have $102,000. So that's just over $40 a month, which is nothing, right?

But just over $40 a month, over 33 years, and I'm gonna have a hundred grand. Or just say you took the five grand that you are gonna plunk down in cash on that bag or on that holiday and just invested that and did nothing else. You just put that into shares at 9% and then walked away from it. Again, after that same period of time, you are going to have $96,000. And that is the power of compound interest.

And the reason I wanna tell you this is cause there's always an opportunity cost. And we often think that the opportunity cost is the interest that will save on our credit card. And that's really important to understand that that is definitely a thing, as I explained in the first example. But the real opportunity cost that you are not even considering is the compounding effect of the investment that you could have made instead of buying that thing or the experience that will depreciate in value.

And here's the thing I'm not suggesting that you don't wanna enjoy today, but what I am saying is if you are not already regularly investing and saving, then this should be your priority before you go and buy that expensive bag or that overseas trip.

So let's go to number four then. What if you don't have credit card debt? What if you are saving and investing? Surely it's okay to buy the bag and go on the holidays then?

And as always, if you've listened to me for a while, you'll know the answer is 'it depends'. And that's because it's really important to understand what your goals and priorities are when it comes to money.

So let's say your goal is to save $10,000. It might be to start a business, to buy a house, to create a buffer account. If that $5,000 that you are gonna spend on that holiday or bag, or whatever that is for that short-term pleasure, that's really only hurting you and delaying that dream and that goal. That's when it's time to look at yourself and ask yourself honestly, if your longer term goal is worth more than your immediate gratification? Which might mean trading the Prada bag for a far cheaper afternoon spa session. That means your savings are intact. That investing goal, you're still racing towards that, but you are still receiving a pat on the back.

If you do you decide that your goals aren't worth it, that that instant gratification is far more important, then I wanna tell you, I wanna suggest to you that you need to question whether they're really your goals and what you want to be working towards instead, that will actually motivate you.

And if you want help with this, I love goal setting, I'm such a fan of, of setting goals. So I created a mini-course called My Financial Focus. Again, we'll put it in the show notes and that's a way of helping you create goals for the long term, the median term, and the short term that you are actually excited.

And yes, those goals might mean an overseas trip or a handbag, a Prada handbag, or whatever that particular thing is for you, but it's making sure they are your goals and that you're not buying into something that you think you should have to impress people that you don't even potentially know, like or care about.

So I am really passionate about this. I am seeing far too many women particularly walking around with status symbols on their arm, and I know that they don't have the $5,000 at that bag cost in their bank account or in shares.

And I wanna suggest to you that if you don't, then you can't afford the bag. You can't afford the holiday.

And maybe it's time to use one of my hacks. One of the things that I do is every time I spend a dollar on shoes or clothes or bags, I have to put a dollar into the share market. That way, yes, I can still enjoy today, but I'm also looking after future me. It's a way of limiting my consumption and still enjoying it, guilt-free. But I have to be able to afford twice as much because I need to be able to afford to invest the same amount as well.

So if that's you, if you're prone to overspending, maybe that's a great hack to keep you in check. Because if you can't afford to put the exact same amount into looking after future you, then maybe current you shouldn't be doing it.

And the other thing that you could consider, if this is something you really wanted and you're like, ugh, I just want some short-term gratification, then sure, consider what something else cheaper might be instead. Or look at ways to find that income outside of your normal wage or your normal business. So you might say, you know what? I've allocated my wage and all my business income to go towards my short-term and my long-term goals. That's all taken up. So if I want that handbag or holiday or whatever that is, I have to find that from extra money. And if I do, then I can spend that guilt-free on any of that luxury or frivolous things that I haven't planned for.

And again, I've got a free webinar called 50+ Ways to Find 10 K in 12 months. So if this is something you really wanted, you could use that webinar to find that 5K within six months and problem solved.

But if you have bad debt, if you're not investing, I want you to start there first. As I said in the beginning, part of my role is to make sure that you are a mindful and conscious consumer.

To be aware if this status symbol or that Instagramed holiday is keeping you further away from your goals and to make sure you are aware of the real cost.

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