Debt Free

One big paycheck; it's a dream of many. Let's say you won the lottery or some other contest, and elected to take the bird in the hand instead of 20 year payments. You may have the type of job where you receive irregular payment, but when you get paid, it's a whopper. Commission sales reps and commercial fishermen spring to mind as examples of such jobs. In these jobs you get little money throughout the year, and then receive the lions share of your compensation as one big paycheck . Professional athletes, especially those at the start of their careers, are often in this same boat. Baseball players will get drafted out of high school, receive a handsome signing bonus, and be sent to the major league's farm system. There the prospect may get hurt, or languish in obscurity forever, never making it to the “show”, but still having the initial $100,000, $200,000 or $500,000 signing bonus. 

If you found yourself in such a position, what would you do? Maybe you're there now, with that fat check burning the proverbial hole in your pocket. What would you do? I have a friend who's got a great, commission sales job. He just bought a Porsche 911. Would you do the same?A new boat perhaps? He is financially able to make the Porsche purchase without harming himself due to a high income and some good real estate deals in the past. Many people are not so fortunate.

The car dealerships in coastal towns thrive on fishermen, especially young ones, returning from the sea and heading straight on over to by that new 4x4 or Mustang GT they've always wanted. I worked for a company some years ago that had just such a dealership, and the end of the various fishing seasons were much anticipated events. They created a large percentage of the annual gross profit for the dealership as the fishermen rolled in with fat checks from their share of the catch.

It's tragic in a way that the youngest among us are least equipped to handle such windfalls, but most able to benefit from them. Due to the effect of compounding, such a large sum could be a life changing event if it's handled correctly. For the young athlete or fisherman, going to the Chevy dealership for a new $40,000 4x4 Silverado isn't the most fiscally responsible choice. Here is how that cash could affect the future of the same individual if it was invested in some other ways.

2007 Chevy 2500 4x4, ¾ ton with the Duramax Diesel engine and full power options retails for $39,703. Figure another 7% or so for taxes, to bring the total price to $42,482. According to the Automotive Lease Guide, it rates 4 stars for expected depreciation, so you'll lose comparatively little there, compared to many other vehicles. Still, figure in 10 years, it'll be worth around $15,000.

Index mutual fund – Put the same $42,482 into an index fund such as the Vanguard 500 (as the name suggests, it tracks the S&P 500), and you'd likely see the following. Of course predicting future stock market performance is a bit dicey, and if you could do it accurately, we'd all be buying your book on Amazon, but here goes. From January 1997 to January of this year, the fund gained about 80% in value. The $42,482 you put into the truck would be worth approximately $76,638 if it performed similarly over the next 10 years.

Perhaps you'd rather invest in real estate. Here is gets trickier, due to the local nature of real estate markets. You could get a 400% return for the 10 years, or you could get no return at all, depending on where you put your money. The one advantage you get to real estate you don't get with the stock market is the power of leverage. That $42,000 could purchase property worth about $420,000 if you put 10% down. Assuming an annual real estate appreciation rate of 6%, you'd turn that $42,000 into a property value of $752,156. Take out the original purchase price of $420,000, less any principal paid to date, say $20,000, and you'd have a gain of $352,000.

This ignores the mortgage payments made in the interim, so we'll factor those payments in. Assuming a 30 year, 6.5% mortgage (that may not be the best choice in this instance), your monthly P&I payments would be about $2,401. Your payments for the 10 years would be $288,120. $211,000 of that would have been interest. You'd get a mortgage interest deduction as well, so if you are in the 35% tax bracket, that's a savings of roughly $73,000 in income taxes. You would, however have to pay property taxes during the 10 years. $2,500 a year for taxes sounds about right, so there's about $25,000 in property taxes paid over the 10 year period.

If you sold the property after 10 years, your original $42,482 would have turned into $111,880. This ignores the fact you’d probably have to pay for a place to live during the 10 years anyway, and that lodging has some value that would add to your return. In addition, you’d have selling expenses associated with realizing your gain that would have to be deducted from your return.

So, you could choose the stock market, real estate, or perhaps some other investment. Any way you slice it, they’d probably outperform the Chevy, except when it came to towing.