One of the issues we frugal folks hate to deal with is buyer’s remorse. We don’t want to feel stupid or cheated, so we buy less things and experiences. Minimalism and early retirement go hand in hand.
We’re always looking for a deal, partly to minimize disappointment. And if we can get something for free, even better.
But something interesting happens over time that most frugal people who should be spending more money don’t fully appreciate.
And that is that over time, we get richer, which makes all the luxury spending or foolish spending mistakes seem smaller and smaller.
In other words, the natural progression of our money helps reduce our buyer’s remorse over time. So, we shouldn’t be afraid to loosen up from time to time, especially as we get older.
Buying too much car is a common personal finance error
The Classic Luxury Expenditure is a car that costs more than a Honda Civic. No one needs more than a brand-new Honda Civic for $28,000 to travel for a family of four or less.
So, every dollar above the price of a basic economy car is either a waste or a luxury expense, whichever way you want to put it.
With my current car, I bought it in December 2016 for $60,000 after taxes. This is a 2015 Range Rover Sport with 10,200 miles on it at the time. I thought it was a good deal since the car was selling for about $82,000 brand new.
Before the Range Rover, I was leasing a 2017 Honda Fit for $240 a month. But when my wife got pregnant, I decided to get a larger family car. This was a huge jump in cost.
But I told myself that if I meet with an accident in the Honda Fit and my child gets hurt, I will never forgive myself. So I expressed my desire to spend more money myself. It felt very uncomfortable, especially when a boring Toyota Highlander for $40,000 would have been just as safe.
Almost 10 years later, I don’t regret spending so much on the car, even though I could have made a lot more money if I had invested $60,000. The main reason for this is the increase in net worth.
Compare your net worth from when you spent to now
In 2016, at age 38, let’s say my net worth was $600,000, but I decided I just had to have this $60,000 car. That terrible decision would have cost me 10% of my net worth in cash.
After a year, I realized that I had spent too much on the car based on the 1/10th rule of buying a car and I regretted my decision. Let’s say my passive income was only $25,000 a year, which means I should have bought a $2,500 car instead.
However, after ten years, let’s say my net worth has tripled to $1,800,000 after compounding at 11.6%. The $60,000 car now represents only 3.3% of my net worth – a much more reasonable percentage for someone who wants to retire by age 50.
What’s even better is that the car is now only worth $15,000, meaning it’s only 0.8% of my net worth. The longer I keep up my luxury spending, the more I compensate for spending too much money 10 years ago. This is an important task if you want to reduce your home-to-car ratio for financial freedom.
If you continue saving and investing, over time, you naturally correct and atone for your spending ways.
And when you look back, purchases that once seemed irresponsible often turn out to be financially bad. Insignificant.
Spending a lot on a house pays off over time
After cars, the next item that people may accidentally overspend on is home. But in the case of a home, the consequences can be much more serious because of the larger absolute dollar amount.
Just look at how many homeowners had to go through a short sale or foreclosure during the global financial crisis of 2008. That’s why I recommend following my 30/30/3 home-buying guide. You can multiply your annual household income by 3 to 5 times, but I wouldn’t go any further than that.
Let’s say you and your wife are first-time home buyers with a net worth of $500,000 and an income of $200,000. You disregard my 30/30/3 home-buying rule and buy a home for $1.2 million, or 6 times your household income and 240% of your net worth. You are optimistic about increasing your income. Plus, you have a generous bank of mom and dad who helped with half of the 20% down payment.
Unfortunately, one of you loses your $120,000 job due to AI, leaving your household income temporarily at $80,000. After six months of searching, you decide to take gig work for $40,000 a year. Suddenly, your $6,000 mortgage at 6% doesn’t seem affordable at $6,666 in gross monthly income. After all, you also have to pay property taxes, insurance, and maintenance expenses.
You don’t want to sell the house and downsize because you just bought it. Selling will consume 5-6% of your home equity in transaction costs. So you do what many young adults do these days and ask for more financial support from both types of parents.
Parents to the rescue again
Given that they do not want their children to struggle, each group of parents gives $20,000 per year, for a total of $40,000. Their parents want grandchildren! After three years of financial assistance, eventually your household income is back up to $200,000 per year and you no longer need help.
Ten years later, your stock investment of $500,000 has grown to $1,279,000, compounded at an 8.5% annual rate. Plus, the $1.2 million house you bought is now worth $1.65 million.
After putting down $240,000, paying off about $185,000 in principal, and taking advantage of $450,000 in home appreciation, your home equity has increased to about $875,000. Add up your stock investment portfolio of $1,279,000, and your net worth is approximately $2,154,000.
Oh! You made it. After taking excessive risks and getting help from your parents to survive the tough times, your home is now worth 76% more of your net worth.
Once you get your house to my recommended level Less than 50% of your net worthYou will start feeling more financially secure. And once you reach the ideal range of 20%-30%, you will truly start to feel financially free.
Time and disciplined investment can gradually improve even questionable financial decisions.
Don’t regret spending on big splurge
As I look back at all my big expenses, I don’t have a single regret as my net worth continued to grow during the holding period. In fact, after every splurge, I doubled down on saving and investing more to offset the expense.
My most recent expense was buying a house I don’t need in 4Q 2023. Suddenly I became rich from home and deprived of cash. So I rationally decided to do part-time consulting work to replenish my coffers. I was also eager to experience the startup process again. Four months later, I had saved about $40,000 and moved on.
Sure, I could have made more money by investing the cash instead of buying a nice house. But you should also enjoy the money you make and the investment returns you get. Plus, with the fierce bidding, I doubt I would be able to buy my house if it came on the market today.
In 2022, I was competing against a Google executive and lost, but he backed out at the last minute. Today, I have to compete with the same people and employees from Anthropic, OpenAI, and many other AI companies.
You can probably spend more if you’re an investor
There’s a constant race against time to spend your money responsibly before you run out. It would be terrible to work so hard and invest so diligently, but never enjoy the fruits of your sacrifices.
Even at a conservative 4% safe withdrawal rate, if your net worth grows at a reasonable 7%, in 10 years your net worth will be 34% higher, and in 20 years it will be 81% higher. If your net worth grows at a rate of 10%, you will have 81% more in 10 years and 259% more in 20 years.
Based on my experience since being fired in 2012, a 10% annual compound growth rate is realistic, especially if you start earning supplemental retirement income. In other words, at a 10% return and a 4% withdrawal rate, $1 million will grow to approximately $1.81 million in 10 years and $3.59 million in 20 years.
This means that many financially disciplined people will become much richer than they expected simply by staying invested.
So don’t worry too much. If you make a terrible spending mistake, keep saving and investing and you’ll probably be fine.
The longer you do this, the smaller that mistake will seem in the future.
Readers, have you found that time has corrected many of your past financial mistakes as you have become wealthy? What are some examples? what time is it No Have any past financial mistakes been corrected?
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