Rules for Buying a House, Car or Phone and Live Debt-Free
Some context about how I came up with these financial rules about buying a house, a car, or a smartphone: Brazil is not a rich place. It has plenty of natural resources, but in terms of per capita wealth, it is far from the first tier.
According to the latest IMF report, the Brazilian annual GDP per capita (or annual income per capita) is $7011. It is in the same category as Turkey, Peru, Thailand, or China. Among the 195 countries present in the IMF report, Brazil has only the 87th highest per capita income.
It may surprise you to know, however, that Brazil is also one of the major markets for luxury goods and expensive vehicles on the planet.
- It is one of the 10 largest markets for the luxury SUV manufacturer Jaguar Land Rover. Their most sold car, the Range Rover Evoque, costs R$280 950. More than 54 000 dollars. This is the equivalent of 92 months of Brazil’s average income.
- Despite having the highest iPhone prices in the world (in good part thanks to extremely high taxes and bizarre laws), still Brazil is one of the 6 largest markets for Apple.
- 60% of all the smartphones sold in Brazil have a price tag at least as high as the national monthly income (1380 Reais). 21.6% of all the phones marketed in Brazil cost more than 2500 Reais.
- Louis Vuitton Moët Hennessy — the world’s leading manufacturer and retailer of luxury products — considers Brazil one of its main sources of growth.
How is it possible that in a relatively poor country, luxury brands find so many potential customers?
But they are not that numerous to justify the almost 100 thousand cars that Jaguar Land Rover alone sold in the last few years. They are not that significant to explain why LVMH considers Brazil one of its strongest markets.
The truth about how Brazilians purchase such a sizeable amount of luxury items resides in another thing.
Consumer Credit
In Brazil, people take loans to buy stuff. It may not surprise you that someone takes credit to buy a house or even a car. But what I mean is a general custom of taking credit to buy anything: clothes, cell phones, laptops, even whiskey — Brazil is the largest consuming market of Johnnie Walker’s Red Label.
This could lead you to believe that credit in Brazil is cheap. Otherwise, why people would use it to purchase superfluous items?
Wrong conclusion. Credit is expensive in Brazil. The average interest rate for a vehicle loan is 21% per year. Credit for durable goods like cellphones and laptops has even higher rates.
While credit is expensive, it is also widely available. Therefore, people enter a debt circle where they are always paying installments for their phones — swapping it for a new model when they finish the previous loan — cars, etc.
So Why Brazilians Don’t Buy Cheaper Things?
That is a good question. I would bet it is cultural. If you are a middle manager or a self-employed professional (lawyer, stockbroker, etc), riding an old car can be seen as a sign that you are not good at what you do.
So people purchase things way over their reality because of a desire to show status and success. That explains why the average age of the Brazilian motor vehicle fleet is only 9.7 years. Brazilian have newer cars than people from richer countries like Sweden (10 years of average car age), France (10.2), Norway (10.7), or Italy (11.4).
The place where I live, Poland, has a per capita income over two times higher than Brazil. Still, Poles drive cars on average 14.1 years old. My wife, a professional with 5 years of experience in global banks, has a 10-year-old car. Meanwhile, in Brazil, most of my friends with similar experience drive vehicles for 5 years or less. While my wife paid for her car with part of her savings, my Brazilian friends buy their vehicles using bank loans.
Because they don’t want to drive old cars. Instead, they prefer to live indebted.
Once I was discussing this topic with my friends from the University of Sao Paulo. They asked me “So, what would be your rules for buying a car, or a house, or a cellphone, Mr. Frugal?”
Below is what I told them. Rules that certainly I will teach my kids. Not only do they serve as a basis to adapt your consuming habits to the available resources, but also to avoid debt and have a decent financial life — instead of jumping from loan to loan.
Rules which are also used by people like Warren Buffett, a legendary investor, and avid reader.
Who Can Use These Rules Buying a House, a Car, or a Smartphone?
A short disclaimer: these are rules from a middle-class individual. The super-rich will not count money in terms of months to buy their favorite car but in hours. In the other extreme, a student with a part-time job may think I am telling him to not have a smartphone at all.
No, this is not what I am saying. These rules may not work for extreme cases. These rules are for middle-income people — sorry for the lack of inclusivity, but I would not dare to establish numbers for situations that I am not familiar with.
In other words: these are financial rules for buying a house or a car that I use for myself and they have worked so far. For you, it may be different.
How Much Should I Pay For a Phone Or Laptop?
My principle is to never spend on a laptop or cellphone more than 10% of the value of a monthly net salary, considering that we change these things on average every 2 years.
A friend of mine — the economist with whom I often make some bets — prefers to pay higher prices for smartphones that, in his opinion, resist longer, which makes sense too. Despite that, you should be able to pay for your phone with your own money, never take credit just to boast the last Apple super-expensive device.
How Much Should I Pay For A Car?
For many people, including me, a car is simply a transport mean. So the first question you should ask is: do you really need a car? Do you need something that certainly will lose value with time while requiring maintenance and taxes to pay?
If the answer is yes, then think about how much you use a car, and for which purposes. A family with kids has completely different requirements than a bachelor’s.
My personal rule is that a car should not correspond to more than 4 times my monthly income. This is a command that I obey since I was a teenager, driving a 10-year-old budget Corsa with no AC, but paid with my own salary as a trainee. No debt.
How Much Should I Pay For A House?
Here, the question is more complex, and, differently than the other examples, it is acceptable to take a loan to buy a home. In fact, it is often even desirable to get credit for this purpose, as I explained in this article about when to buy a house.
Mortgages have far lower interests than any type of consumer credit — not because the banks want you to have a roof, but because the risk for them is reduced since they use the real estate as a guarantee in case of insolvency.
Still, you should not buy a castle if your pockets are not deep enough. My advice for a bachelor or couple with no dependents is to look for properties whose price is at most the equivalent to 48 times their net monthly income.
By following these simple financial rules for buying a house, a car, or a smartphone, you will not enter the credit loop that consumes entire decades of hard work and turn people into slaves of their debts.
What to do with the rest of the money? Save for early retirement, because the public pension system is an illusion.
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Levi Borba is the founder of expatriateconsultancy.com, creator of the channel Small Business Hacks and the same website for Small Business Owners, and best-selling author. Subscribe to my articles (for free) and receive (also for free) the ebook “The Blueprint for First-Time Business Owners”.