Have you ever wished to spend your summer on a luxury yacht?
I did today.
I was on the beach, in the Algarve (Portugal), relaxing and looking at the yachts passing by.
‘Wouldn’t it be nice to have one of those?’ – I thought.
And just before I started dreaming about buying a smart yacht with great facilities, another question popped into my mind: is the dream to buy a yacht or to hire one for a month?
It’s better to hire one, I decided.
Now, I do realise that this may be having you, my reader, ready to denounce me as ‘a woman with very little financial sense’. Particularly if the next big financial goal you’ve set up for yourself is to own your house, your car or your boat.
Before you do, please hear me out.
For many years my financial goals were about ownership; particularly, I wanted to own my house outright. I still do.
I do realise though, that this doesn’t make me a ‘woman with good financial sense’; it makes me a middle class woman who questions her financial future.
Ownership matters little when it is out of reach (one is too broke) or when it is non-problematic (one is really wealthy).
To get back to the yacht, if I were really broke I’ll be dreaming about a day trip on a boat (if I really liked this kind of thing). If I were really wealthy, I’d be thinking about hiring a luxury yacht for a month (this I suppose is the absolute limit to my ‘sea legs’). A 30m luxury yacht to sail the Mediterranean can be hired for about $50,000 per week.
And the main thing is: once the month is over there are no bills for expensive docking, no repair bills and no maintenance costs. It’ll be off my hands and off my mind.
And if anything, it seems to me that, as economy and civilisation, we are moving more towards hire/renting than ownership. Today one can hire anything: designer evening dress, cars, holiday apartments, fitness equipment, gardening tools, party escort and, if this is what rocks your boat, big diggers.
The Maths Still Doesn’t Work!
‘You may talk about how convenient hiring/renting is but the maths still doesn’t work. Why waste all this money on renting when we can own the thing?’ – you may be thinking.
You want maths, I have some maths for you.
I’ve never been too fussy about cars: if it takes me from A to B, I’ll have it. And if it is cheap to buy and run I used to be a happy woman.
Until I saw the Range Rove Evoque!
Now, if I get really serious about driving a Range Rover Evoque I’ll have to choose between buying it or contract hiring it.
Let’s say that I’m going for the basic model which is Range Rover Evoque Pure. This is will cost the following:
- To buy: $49,000.
- To contract hire: $435 per month ($5,220 for a year).
Now, I can go in the more complex mathematics of what will happen if you invest $49,000 or if you have to borrow it.
I don’t think this is necessary.
I’d just remind you that during the first three years cars depreciate at 50% rate or more. Assuming depreciation rate of 50% over three years means that the sparkling Evoque I just bought will lose me $24,500.
To contract hire it for three years will cost me $15,660.
So you see, buying an Evoque will be $8,840 more wasteful than contract hiring it.
Hiring vs owning
Now that we’ve dealt with the matter of cost – and seen that contract hire is not necessarily more expensive or wasteful than purchase – let’s turn to the advantages of contract hire and ownership as I see them.
Contract hire/renting offers:
- Flexibility: Using contract hire and renting keeps people very flexible. You could move to live in another city, or even another country, with ease and without the hustle of selling, putting in storage and preserving possessions. You just have to cancel the lease.
- Versatility. When you contract hire or rent it is easy to change and upgrade. If the apartment you are renting becomes small you find another one; if you are disappointed in the car you contract hire you can change to another model. Sometimes this change incurs penalties (so be careful to check the conditions of the contract before you sign) but these are usually less than the cost of buying the wrong item.
- Hassle free use. Usually contract hire and renting go with hassle free use. What do I mean? If you own a house and the shower leaks this is your responsibility; if you rent and the shower leaks this the landlord’s responsibility. If you contract hire a car, the contract may include service and maintenance; and you can walk away in three years (or however long the contract is).
- No depreciation costs. Remember the example with the Range Rover Evoque I used? Well, this is what I’m talking about.
- Capital flexibility. Contract hire and rent increase monthly expenses and decrease cash flow. This in turn can reduce the level at which you save assuming that you haven’t taken measures to increase your income. However, purchasing a large, expensive and depreciating item upfront reduces your capital. In my book, capital is more important than cash flow.
- You can afford more than if you buy. This is generally true although the wisdom of using more with little regard for the future can be questioned.
Ownership offers some advantages as well. These are:
- Stability. If contact hire and renting offer flexibility, ownership provides stability. If you own s house, you’d always have a home; if you own your car it’ll be yours never mind what.
- Security. Ownership offers security in the knowledge that you can never find yourself in a desperate situation.
- Discretion of use. Ownership usually afford unlimited discretion over the items you use. You can paint your bedroom black, hammer nails in the walls and scratch the name of your lover on the bumper of your car. Well, you could; I never said that these actions make sense.
How to decide whether to own or the hire
Decisions as to whether to own or contract hire particular item are very personal and would depend on the individual situation and preference.
Still, there are four questions that can help you decide whether to select ownership or contract hire/rent. These are:
- What is the item? It is quite clear that contract hire/rent is not appropriate for all items we need and use in our everyday lives. I, for instance, will never hire clothes, shoes and other personal items. At the same time, I fail to see the harm in hiring cars, boats, gardening tools, other tools that are not used often like carpet cleaners, sanding machines and the like. Thinking about it, I am not averse to hiring some obscenely expensive jewellery for an occasion (yep, and you can call me shallow if you wish).
- What stage of life are you in? We always need a level of flexibility and stability in our lives. It is just that the ratio changes with age: the younger we are, the more flexibility we are likely to need.
- How secure is your income? Contract hire/renting makes more sense the higher your income security is. If, on the other hand, you are not very secure in your future income (all of it is from a job, for instance) it’d be better to choose ownership.
- Is exclusivity important for you? Well, some people are really keen on exclusive use of space and gadgets. If you are one of them contract hire and renting may not be appropriate for you.
The decision to own or hire/rent the large, expensive items in life (like houses, cars, boats and equipment) is to a straight forward one and depends on personal circumstance and preference.
Don’t discard contract hire and renting as waste of money; in many cases purchase can be more wasteful than contract hire.
As to us, we will keep our house; for now. We have been contract hiring our car for about a decade now; and it is working out okay.