Can South African’s afford to splurge in 2010?

With a number of luxury goods makers reporting better than expected sales during the last three months of 2009, it is clear that consumers continued to splurge on gifts over the festive season, despite the recession. Swiss luxury goods maker Compagnie Financiere Richemont recently reported a 2% rise sales for the quarter that includes Christmas, boosted by sales of jewelry and specialist watches.

Unfortunately, says Clint Harker, a lot of people who have splurged on expensive items find they are unable to afford the costs associated with owning these items.

This issue was recently brought to light when Howick property developer, Rob Taylor handed over the keys to his Audi R8 to two Cape Town car guards in a spontaneous act of goodwill. However well intended this act of charity, it could well cost the recipients much more than they can afford. “Annual insurance for the R 2 million car alone will cost in excess of R30 000,” notes Harker, “not to mention the high fuel costs and maintenance expenses that come hand-in-hand with these kinds of assets.”

Luxury items not only don expensive price tags, but the associated upkeep, financing and insurance costs necessary to maintain them can be extensive and are often overlooked by consumers. In the case of car insurance, for example, insurance can cost as much as 3% of the vehicle’s original value. New boats – another favourite luxury purchase – have relatively low maintenance costs for the first three years. However, thereafter operation and maintenance costs increase exponentially including costs for fuel, transport, trailers, storage, repairs, cleaning, paint and labour.

Clint Harker advises people to take some time to understand the additional costs associated with buying a luxury item. He points out that it is not as simple as having enough money to pay the asking price. Many South Africans, after acquiring an expensive luxury item, find that they cannot afford to add the valuable acquisitions to their insurance policies, potentially leaving themselves open to financial loss either through loss, theft or damage.

“People are often shocked when they realise that they do not have the funds to commit to the maintenance or insurance after purchasing valuable assets”, says Harker. “The important thing to remember is that if you cannot afford the additional costs of your purchase, then in reality, you cannot afford the asset at all.”

Harker notes that in some cases, wealthy South Africans simply forget to insure new assets – or are not aware that the asset is not covered by their existing insurance policy. According to Harker, most traditional insurance policies would require any new expensive items to be specified in order to be properly insured and might also need proof of purchase. “While certain insurance brokers automatically include new acquisitions under an all-risks policy, it is dangerous to assume that expensive acquisitions will be covered if you have not consulted with your broker upfront,” warns Harker.

“It is also good idea to get into the habit of keeping receipts and any other information that relates to such purchases.”