I grew up sailing on one of the Great Lakes with lifelong friends. I fell away from sailing while raising my family in Charlotte, running between soccer, basketball games and cheerleading competitions with my children and dedicating my time to clients at Parsec. But the passion for sailing was still there once my children had grown up. Now I have the time to devote to my passion. Time to buy a sailboat!
You may have a passion or hobby that you love as well. It could be horses, classic cars, luxury cars, wine collections, a full humidor with the finest cigars in the world, art, travel, etc. Often our hobbies come with very expensive equipment, and usually these are assets that have depreciating values. In other words, they may not be an investment. However, you worked hard and accumulated a certain amount of net worth and would like to enjoy the fruits of your labor.
So how do you go about justifying the price of these luxury items? Whenever I look at making this kind of purchase, I also evaluate the opportunity cost. What does that mean, you say? If I am making a purchase for a hobby and need $50,000, that is money I am taking from another source. If I were to invest that money for 20 years, it could potentially be worth $193,500 at a 7% rate of return. So is that $50,000 purchase really costing me $193,500? That is certainly one way of looking at it.
Of course, it is not easy to put a price on the joy your passions bring to your life and your family, so we need to find the most tax-efficient way of covering those costs. That may be to sell assets in your investment portfolio — but you may have a substantial amount of capital gains. Liquidating assets would create capital gains tax that could push you into a higher tax bracket and affect various Medicare costs if you are over the age of 65.
May you always have fair winds and following seas!