But I want it!

Is that a familiar thought when you see something you want to buy, but aren’t sure you should?

I know it is for me.

3 Ways to Think About Spending Now that Support Your Overall Happiness

The most important thing you need to remember when considering a purchase is to maintain a good balance between your current needs/wants and your future ones.

Spend too much now, and your future self will suffer.

Be too frugal now and you may make your present so grim that you can’t stay the course long enough to ensure future happiness. Worse, you may not live long enough to enjoy the fruits of that frugality.

Does the Purchase Align with Your Priorities?

Certain things you have little choice about, like taxes.

Other things you can affect around the margins, but can’t avoid altogether. This includes things like rent/mortgage, utilities, food, transportation, etc. If you’re committed to frugality you can reduce them significantly (e.g., house-hacking, making do without a car, etc.).

Yet more things are completely discretionary.

In this last category you have the most control. Here, think about how you’ll likely feel about the purchase tomorrow, next week, next month, and next year. Will you regret the purchase, or will it be useful and/or create happy memories?

Think about your priorities and goals in life and whether the purchase aligns with them. If it does, make the purchase and save elsewhere.

Is the Purchase Worth the Time-Cost?

By converting the cost of the purchase from dollars and cents to hours of work you can consider if it’s really worth it for you.

Here, divide your annual after-tax income by the number of hours you work, commute, and/or do other things that support your work throughout the year. This gives you the dollar value of an hour of your time.

For example, say you earn $50,000/year after taxes. Say also that you work a total of 1800 hours/year, and spend another 200 hours/year driving to/from work, answering work emails outside of work hours, etc. Divide the $50,000 by the total of 2000 hours and you get a $20/hour value.

In this scenario, ask yourself if you could work an extra 5 hours to replace the money you’re spending. If you do, ask yourself if it’s worth it to do that. If not, there’s your answer – skip the purchase. If yes, pull out your wallet and enjoy the purchase.

But what if you don’t have any way of making up the money by working an extra 5 hours?

Maybe your position is limited to a set number of hours, or you have too many other responsibilities (e.g., raising kids, etc.) so you can’t spare those hours.

In this case, move on to the third consideration.

Is the Purchase Worth Permanently Reducing Your Retirement Standard of Living?

If you spend a dollar now, the opportunity cost of that dollar is much more than $1.

Say you’re 30 years away from when you want to be able to retire. Using the 7.04% average inflation-adjusted return for stock investments over the past 150 years, each dollar you invest now would be worth about $7.70 in 30 years.

Thus, the opportunity cost of $1 spent now is $7.70 for 30 years from now.

Next, using the venerated 4% rule, each $1 lost from your retirement portfolio means $0.04 less available each year in retirement forever (since this “rule” isn’t really a rule but rather a guideline, you could choose to use a different number like $0.05 or $0.03).

For $7.70, that loss would be $0.308.

This means that for each $1 you spend now and don’t replenish, you’re reducing your retirement income in perpetuity by $0.308/year.

Translating to a $100 purchase, that’s $30.80 less each year in retirement.

For a $1000 purchase, it’s $308/year less available for your future self’s retirement.

All in the example of having 30 years until your potential retirement.

How to Use These Ways of Thinking Most Effectively, in Combination

At the start of the year, estimate two things:

• Your net hourly income (dividing after-tax income by total work-related hours)
• our loss of retirement income per dollar spent now (= 0.04 * 1.0704 ^ N, where N is the number of years to your potential retirement)

Use these two numbers to determine for each (significant-to-you) purchase you consider:

• How many extra hours would I need to work to replace the money?
• How many dollars less would I have each year in retirement
• Is this purchase important enough for me and aligned enough with my priorities to justify these impacts?

If your answer to the last question is “Yes,” go ahead.

Otherwise put your wallet away.

When a new year begins, rinse and repeat. The two numbers above have likely changed since your income may have increased, and you have one less year to your potential retirement (or you may have decided to retire earlier or later than you thought the year before).

The Bottom Line

If you aren’t intentional about your discretionary spending, you very likely live paycheck-to-paycheck, and risk spiraling into debt if any unexpected expense comes up (think medical bill, paying the insurance deductible on your car insurance after a fender bender, your kid needing some dental work, etc.).

If you want to avoid this, and to have a good chance for a comfortable retirement, use the above framework to make better spending decisions. Your future self will thank you, and your present self won’t find it very hard to stick with, because you’ll still spend on your priorities.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial, investment, business, tax, or legal advice. You should consult a relevant professional before making any major decisions.