The cost of money

time to read 8 min | 1401 words

This is just some rambling about the way the economy works, it has nothing to do with tech or programming. I just had to sit down recently and do the math, and I am pretty annoyed by it.

The best description of how the economy works that I ever heard was in a Terry Prachett’s book, it is called Captain Vimes’ Boots’ Theory of Money. Stated simply, it goes like this.

A good pair of boots costs 50$, and they last for 10 years and keep your feet warm. A bad pair of boots costs 10$ and last only a year or two. After 10 years, the poor boots cost twice as much as the good boots, and your feet are still cold!

The sad part about that is that this theory is quite true. Let me outline two real world examples (from Israel, numbers are in Shekels).

Buying a car is expensive, so a lot of people opts for a leasing option. Here are the numbers associated with this (real world numbers):

  Buying car outright Leasing
Upfront payment 120,000


Monthly payment (36 payments) 0


Buying the car (after 3 yrs) [optional] 0


The nice part of going with a leasing contract is that you need so much less upfront money, and the payments are pretty low. The problem starts when you try to compare costs on more than just how much money you are paying out of pocket. We only have to spent a third.

Let us see what is going to happen in three years time, when we wan to switch to a new car.

  Buying car outright Leasing
Upfront payment 120,000.00


Total payments 0.00


Selling the car -80,000.00


Total cost 40,000.00 93,765.83

With the upfront payment, we can actually sell the car to recoup some of our initial investment. With the leasing option, at the end of the three years, you are out 93,765.83 and have nothing to show for it.

Total cost of ownership for the leasing option is over twice as much as the upfront payment option.

Buying an apartment is usually one of the biggest expenses that most people do in their life. The cost of an apartment/house in Israel is typically over a decade of a person’ salary. Israel’s real estate is in a funky state at the moment, being one of the only places in the world where the prices keep going up. Here are some real numbers:

  • Avg. salary in Israel: 8,611
  • Avg. price of an apartment (in central Israel): 1,071,900

It isn’t surprising that most people requires a mortgage to buy a place to live.

Let us say that we are talking about a 1,000,000 price, just to make the math simpler, and that we have 400,000 available for the down payment. Let us further say that we got a good interest rate of the 600,000 mortgage of 2% (if you take more than 60% of the money you are penalized with higher interest rate in Israel).

Assuming fixed interest rate and no inflation, you will need to pay 3,035 for 20 years. But a 2% interest rate looks pretty good, right? It sounds pretty low.

Except over 20 years, you’ll actually pay: 728,400 back on your 600,000 loan, which means that the bank get 128,400 more than it gave you.

The bank gets back 21.4% more money. With a more realistic 3% interest rate, you’ll pay back 33% more over the lifetime of the loan. And that is ignoring inflation. Assume (pretty low) 2% per year, you would pay 49% more to the bank in 2% interest rate and 65% more in 3% interest rate.

Just for the fun factor, let us say that you rent, instead. And assume further that you rent for the same price of the monthly mortgage payment. We get:



Upfront payment 400,000.00 0.00
Monthly payment 3,000.00 3,000.00
Total payments (20 years) 720,000.00 720,000.00
Total money out 1,120,000.00 720,000.00
House value 1,000,000.00 0.00
Total cost 120,000.00 720,000.00

After 20 years, renting cost 720,000. Buying a house costs 120,000.  And yes, I am ignoring a lot of factors here, that is intentional. This isn’t a buy vs. rent column, it is a cost of money post.

But after spending all this time doing the numbers, it all comes back to Vimes’ Boots theory of money.