One of the things we frugal people underestimate is buyer's remorse. We don't want to feel stupid or left out, so we tend to buy fewer things and more information. Minimalism and early retirement go hand in hand.
We always seek compromise, in part to minimize disappointment. And if we can get something for free, even better.
But there is something interesting that happens over time that many grateful people who have to spend a lot of money do not fully realize.
Which means, over time, we tend to get richer, which makes every luxury expense or spending mistake feel smaller and smaller.
In other words, the natural progression of our wealth helps reduce our buyer's remorse over time. Therefore, we should not be afraid to let go for a while, especially as we grow older.
Buying Too Much Car is a Common Personal Finance Mistake
The luxury classic is a car that costs more than the Honda Civic. Nobody needs more than a new $28,000 Honda Civic to send a family of four or less.
So, every dollar above the cost of a basic economy car is either a waste or a luxury expense, however you want to frame it.
For my current car, I bought it in December 2016 for $60,000 after tax. 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 was leasing a 2017 Honda Fit for $240 a month. But when my wife got pregnant, I decided to skip the Porsche 911S I was testing and go with the big family car. It was a huge cost overrun.
But I told myself that I will not forgive myself if I get into an accident and my child gets hurt in the Honda Fit. So I decided to spend more money. It felt very uncomfortable.
After almost 10 years, I don't regret spending so much money on the car, even though I could have made more money if I had invested $60,000. The main reason why is due to proper growth.
Compare Your Net Worth From The Time You Spend Until Now
Back in 2016, I'm 38 years old, let's say I have about $600,000 but I decided I had to have this $60,000 car. That bad decision would take 10% of my net worth in cash.
A year later, I realized that I had spent too much money on a car based on the 1/10 rule of buying a car and regretted my decision. Let's say my passive income was only $25,000 a year, which means I have to buy a $2,500 car instead.
Ten years later, however, let's say my net worth triples to $1,800,000 after compounding at 11.6%. The $60,000 car now represents only 3.3% of my net worth – a very reasonable percentage for someone looking to retire at age 50.
Even better, the car is only worth about $15,000 now, which means it only represents 0.8% of my net worth. The more I save on my luxury expenses, the more I benefit from spending more money 10 years earlier.
Over time, you naturally adjust and compensate for your spending habits, if you continue to save and invest.
And in retrospect, purchases that once felt carefree are often financial irrelevant.
Overspending at Home Is Corrected Over Time
After cars, the next thing people can accidentally overspend on is a house. But with a house, the results can be worse because of the larger total dollar value.
Just look at how many homeowners had to foreclose or sell during the 2008 global financial crisis. That's why I recommend following my 30/30/3 home buying guide. You can stretch 3 to 5 times your annual take home salary, but I wouldn't go over.
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 6X your household income and 240% of your net worth. You are interested in your income growth. Plus, you have the kind Bank of Mom and Dad to help with half 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, he decides to take a $40,000-a-year gig. Suddenly, your $6,500 loan at 6% doesn't sound affordable at $6,666 in gross monthly income. After all, you have property taxes, insurance, and maintenance costs to pay.
You don't want to sell the house and downsize because you just bought it. Selling will cost 5–6% of your home equity in purchase costs. So you do what many young people do today and ask for more financial help from both sets of parents.
Parents Will Rescue Again
Given that they don't want their children to suffer, 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 assistance.
Ten years later, your $500,000 in stock investments 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 $240,000 down, paying about $185,000 in principal, and gaining $450,000 in home equity. Add your $1,279,000 stock investment portfolio, and your net worth is $2,154,000.
Phew! He succeeded. After taking a lot of risk and getting help from your parents to get you through the rough patch, your home is now worth 76% of your net worth.
Once you reach your home my recommended level is this less than 50% of your total valueyou will begin to feel more financially secure. And once you reach the ideal range of 20%–30%, you will start feeling financially comfortable.
Investing in a structured way can gradually fix even the most questionable financial decisions.
Don't Regret Spending on Big Splurges
As I look back on all my big splurges, I don't regret a single one because my value keeps growing over time. In fact, after every splurge, I would double down trying to save and invest more money to pay for the spending. It was my way of reducing any buyer's remorse.
My latest splurge was buying a house I didn't need in 4Q 2023. Suddenly I was rich and poor. So I logically decided to take a part-time consulting job to replenish the fund. I was also excited to feel the first grind again. Four months later, I had deposited about $40,000 and was on my way.
Of course, I could make more money investing instead of buying a nice home. But the income you earn and the investment returns you generate should also be enjoyed. Besides, with the brutal bidding wars, I doubt I could buy my house if it came on the market today.
Back in 2022, I was competing with the CEO of Google. Today, I'll have to compete for a job at Anthropic, OpenAI, or Databricks which has been there for five years.
You can probably spend more if you're an investor
There is an ongoing race against time to spend your money responsibly before your time runs out. It would be a shame to work so hard and invest so diligently, but never enjoy the fruits of your sacrifices.
Even with a safe withdrawal rate of 4%, if your net worth is compounded at 7%, in 10 years your net worth will be 34% greater, and in 20 years it will be 81% greater. If your net is compounded at a rate of 10%, you will have 81% more in 10 years and 259% more in 20 years.
Based on my unemployment experience since 2012, a 10% compounded annual growth rate is realistic, especially if you start earning extra retirement income. In other words, at a 10% return and a 4% withdrawal rate, $1 million will grow to $1.81 million in 10 years and $3.59 million in 20 years.
That means that many people with good financial habits will end up richer than they expect by staying invested.
So don't worry too much. If you make a bad spending mistake, you'll probably be fine if you keep saving and investing.
The longer you do it, the less likely that mistake will be in the future.
Readers, have you found that time has corrected many of your financial mistakes as you have grown rich? What are some examples? In what ways is the time not did you correct any past financial mistakes?
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