One of the issues 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 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 there’s something interesting that happens over time that most frugal people who should spend more money don’t fully appreciate.
And that is, over time, we tend to grow richer, which makes all luxury expenses or stupid spending mistakes feel smaller and smaller.
In other words, the natural progression of our wealth helps reduce our buyer’s remorse over time. Therefore, we shouldn’t be afraid to let loose once in a while, especially as we get older.
Buying Too Much Car Is A Common Personal Finance Error
The classic luxury expense is a car that costs more than a Honda Civic. Nobody needs anything more than a $28,000 brand-new Honda Civic to shuttle a family of four or fewer around.
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 tax. It is a 2015 Range Rover Sport with 10,200 miles at the time. I thought it was a good deal because 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 go for the bigger family car. It was quite a big jump in cost.
But I told myself that I would never forgive myself if I got into an accident and my baby were to get hurt in the Honda Fit. So I willed myself to spend more money. It felt very uncomfortable, especially since a boring Toyota Highlander for $40,000 would have been just as safe.
Almost 10 years later, I have no regret in spending so much on a car, even though I could have made lots of money if I had invested the $60,000. The main reason why is due to net worth growth.
Compare Your Net Worth From When You Splurged To Now
Back in 2016, at age 38, let’s say I had a $600,000 net worth but decided I just had to have this $60,000 car. That terrible decision would have taken up 10% of my net worth in cash.
A year later, I realized that I had spent way too much on a car based on the 1/10th rule for car buying and regretted my decision. Let’s say my passive income was only $25,000 a year, which meant 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 only 3.3% of my net worth – a far more reasonable percentage for someone who wants to retire by age 50.
Even better, the car is only worth about $15,000 now, meaning it represents just 0.8% of my net worth. The longer I keep my luxury expense, the more I make up for spending too much money 10 years earlier. This is a key act if you want to lower your House-to-Car Ratio for financial freedom.
Over time, you naturally course-correct and atone for your spendy ways, if you keep on saving and investing.
And when you look back, the purchase that once felt irresponsible often becomes financially insignificant.
Spending Too Much On A House Gets Rectified Over Time As Well
After cars, the next item people can mistakenly overspend on is a house. But with a house, the consequences can be much more severe due to the larger absolute dollar amount.
Just look at how many homeowners had to short-sale or foreclose during the 2008 global financial crisis. That’s why I recommend following my 30/30/3 home-buying guide. You can stretch the 3 to 5 times your annual household income, but I wouldn’t go beyond it.
Let’s say you and your wife are first-time homebuyers with a net worth of $500,000 and income of $200,000. You disregard my 30/30/3 home-buying rule and buy a home for $1.2 million, or 6X your household income and 240% of your net worth. You’re bullish on your income growth. Further, you have a generous Bank of Mom & Dad who helped with half of the 20% down payment.
Unfortunately, one of you loses your $120,000 job to AI, temporarily leaving your household income at $80,000. After six months of searching, you decide to do gig work for $40,000 a year. Suddenly, your $6,000 mortgage at 6% doesn’t feel affordable on $6,666 in gross monthly income. After all, you’ve also got property taxes, insurance, and maintenance expenses to pay.
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 adults do nowadays and ask for more financial assistance from both sets of parents.
Parents To The Rescue Again
Given they don’t want their kids 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 assistance, you finally get your household income back to $200,000 a year and no longer need help.
Ten years later, your $500,000 in stock investments has grown to $1,279,000, compounding at an 8.5% annual rate. 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 $240,000 down, paying down roughly $185,000 in principal, and benefiting from $450,000 in home appreciation. Add your stock investment portfolio of $1,279,000, and your net worth is about $2,154,000.
Phew! You made it. After taking excessive 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 get your home to my recommended level of below 50% of your net worth, you’ll start feeling much more financially secure. And once you reach the ideal range of 20%–30%, you’ll really start to feel financially free.
Time and disciplined investing can slowly repair even questionable financial decisions.
Don’t Regret Spending On The Big Splurges
As I look back on all my big splurges, I don’t regret a single one because my net worth kept growing during the holding period. In fact, after every splurge, I doubled down on trying to save and invest more to make up for the spending.
My most recent splurge was buying a house I didn’t need in 4Q 2023. Suddenly I was house rich and cash poor. So I rationally decided to take on a part-time consulting job to replenish the coffers. I was also itching to experience the startup grind again. Four months later, I had saved up about $40,000 and moved on.
Sure, I could have made more money by investing the cash instead of buying a nicer home. But the money you earn and the investment returns you generate should also be enjoyed. Besides, with ferocious bidding wars, I doubt I’d be able to buy my house if it came on the market today.
Back in 2022, I was competing against a Google executive and lost, but who backed out last minute. Today, I’d have to compete with the same guy plus employees at Anthropic, OpenAI, and a number of other AI companies.
You Can Probably Spend More If You Are An Investor
There’s a constant race against time to spend your money responsibly before your time runs out. It would be terrible to have worked so hard and invested so diligently, only to never enjoy the fruits of your sacrifices.
Even at a conservative 4% safe withdrawal rate, if your net worth compounds at a reasonable 7%, in 10 years your net worth will be 34% larger, and in 20 years it will be 81% larger. If your net worth compounds at a 10% rate, then you’d have 81% more in 10 years and 259% more in 20 years.
Based on my experience of being FIRE since 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 4% withdrawal rate, $1 million would grow to about $1.81 million in 10 years and $3.59 million in 20 years.
That means many financially disciplined people will likely end up far 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 OK if you keep saving and investing.
The longer you do, the smaller that mistake will seem in the future.
Readers, have you found that time has rectified many of your past financial mistakes as you’ve grown wealthier? What are some examples? In what ways has time not fixed any past financial mistakes?
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