One of the issues that we frugal people despise is going through buyer’s remorse. We don’t want to feel stupid or ripped off, so we tend to buy fewer things and experiences. Minimalism and early retirement they go hand in hand.
We are always looking for a deal, in part to minimize disappointment. And if we can get something for free, even better.
But there’s something interesting that happens over time that most frugal people who need to spend more money don’t fully appreciate.
And that is, over time, we tend to get richer, which makes everyone luxury expenses or silly spending mistakes feel smaller and smaller.
In other words, the natural progression of our property helps reduce our buyer’s remorse over time. Therefore, we should not be afraid to let go from time to time, especially as we grow older.
Buying too many cars is a common personal finance mistake
The classic luxury splurge is a car that costs more than a Honda Civic. Nobody needs anything more than a new $28,000 Honda Civic to transport a family of four or less.
Therefore, every dollar above the cost of a basic economy car is either a waste or a luxury expense, however you want to frame it.
With my current car, I bought it in December 2016 for $60,000 after taxes. It’s a 2015 Range Rover Sport with 10,200 miles on it. I thought it was a good deal because the car sold for about $82,000 brand new.
Before the Range Rover, I leased a 2017 Honda Fit for $240 a month. But when my wife got pregnant, I decided to skip the Porsche 911S I was test driving and go for the bigger family car. It was quite a large increase in cost.
But I told myself that I would never forgive myself if I had an accident and my child got hurt in the Honda Fit. So I wanted to spend more money. He felt very uncomfortable.
Almost 10 years later, I have no regrets about spending so much on a car, even though I could have made a lot of money if I had invested $60,000. The main reason is because of increase in net worth.
Compare your net worth from when you spent until now
In 2016, at age 38, let’s say I had a net worth of $600,000, but I decided to just have this $60,000 car. That terrible decision would have taken 10% of my net worth in cash.
A year later, I realized that I had spent too much on a car based on The 1/10 rule for car buying 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.
Ten years later, however, let’s say my net worth has tripled to $1,800,000 after compounding at 11.6%. The $60,000 car now represents just 3.3% of my net worth – a much more reasonable percentage for someone who wants to retire by age 50.
Even better, the car is now only worth about $15,000, which means it only represents 0.8% of my net worth. The longer I hold off on luxury spending, the more I make up for overspending 10 years ago.
Over time, you naturally correct and pay off your spending ways if you continue to save and invest.
And when you look back, the purchase that once felt irresponsible often becomes financially unimportant.
Overspending on a home is also corrected over time
After cars, the next item that people can spend incorrectly is a house. But with a home, the consequences can be much more severe because of the larger absolute dollar amount.
Just look at how many homeowners had to sell or foreclose during the global financial crisis of 2008. That’s why I recommend following my 30/30/3 home buying guide. You can stretch 3 to 5 times your annual household income, but I wouldn’t go beyond 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 ignore 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 keen on increasing your income. Further, you have a generous Bank of Mum and Dad who helped with half of the 20% down payment.
Unfortunately, one of you loses your $120,000 job to AI, temporarily dropping your household income to $80,000. After six months of research, you decide to do gigs for $40,000 a year. Suddenly, your $6,500 6% mortgage doesn’t feel affordable with $6,666 in gross monthly income. After all, you also have to pay property taxes, insurance and maintenance costs.
You don’t want to sell the house and downsize because you just bought it. Selling would eat up 5-6% of your home equity in transaction costs. So you do what many young people do these days and ask for more financial help from both sets of parents.
Parents To Save Again
Since they don’t want their children to struggle, each set of parents gives $20,000 for a total of $40,000 a year. Their parents want grandchildren! After three years of financial aid, you finally get your household income back to $200,000 a year and no longer need aid.
Ten years later, your $500,000 investment in stocks has grown to $1,279,000, compounded at an annual rate of 8.5%. In addition, the $1.2 million home you bought is now worth $1.65 million.
Your home equity has grown to about $875,000 after putting down $240,000, paying roughly $185,000 in principal and taking advantage of $450,000 in home appreciation. Add your stock investment portfolio of $1,279,000 and your net worth is approximately $2,154,000.
Eh! You made it. After taking too much risk and getting help from your parents to survive a rough patch, your home is now a more reasonable 76% of your net worth.
Once you have reached your home at my recommended level below 50% of your net worthyou will start to feel much more financially secure. And once you get to ideal range of 20%-30%you will really start to feel financially free.
Time and disciplined investment can slowly repair even questionable financial decisions.
Don’t regret spending on big expenses
As I look back on all my big splashes, I don’t regret a single one because my net worth continued to grow during the holding period. In fact, after each splurge, I redoubled my efforts to save and invest more to offset the expense. It was my way of reducing any buyer’s remorse.
My most recent happiness was buying a house I didn’t need in the fourth quarter of 2023. Suddenly I was cash rich and cash poor houses. So I rationally decided to take a part-time consulting job to replenish the coffers. I was also itching to experience startup grind again. Four months later, I had saved about $40,000 and continued.
Of course, I could have made more money by investing the money instead of buying a nicer house. But the money you earn and the investment returns you generate should also be enjoyed. In addition, with fierce bidding warsI doubt I could buy my house if it went on the market today.
In 2022, I was running against a Google executive. Today, I would have to compete with an employee at Anthropic, OpenAI or Databricks who has only been there for five years.
You can probably spend more if you are an investor
There is a constant race against time to spend your money responsibly before your time runs out. It would be awful to have worked so hard and invested so diligently, only to never enjoy the fruits of your sacrifices.
Even in a conservatory 4% safe withdrawal rate, if your net worth is compounded at a reasonable 7%, in 10 years your net worth will be 34% greater and in 20 years it will be 81% greater. If your net worth is compounded at a rate of 10%, then you would have 81% more in 10 years and 259% more in 20 years.
Based on my experience of being unemployed since 2012, a compounded annual increase of 10% is realistic, especially if you start earning additional retirement income. In other words, with a 10% return and 4% withdrawal rate, $1 million would grow to about $1.81 million in 10 years and $3.59 million in 20 years.
This means that many financially disciplined people are likely to end up much richer than they expect simply by staying invested.
So don’t worry too much. If you make a terrible spending mistake, you’ll likely be fine if you keep saving and investing.
The longer you take, 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 wealthier? What are some examples? In what ways is there time? NO fix any past financial mistakes?
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