By Brad Thomason, CPA
People who advise others on finance often get asked how much money would be OK to spend on something unnecessary, like a big vacation, or a fancy car or something like that.
Once, while stuck in an airport terminal, I watched fifteen or twenty minutes of a program with a well-known host. I only watched for that long because I couldn’t handle any more, and started walking up and down the concourse to burn the time until the plane showed up, just to escape the TV.
It was the call-in portion of the show (or maybe they did that for the whole time) and pretty much every caller would give a quick verbal overview of his or her job situation, balance sheet, etc, and then ask the host if it would be OK for them to spend $X on something unnecessary. Inevitably, a two or three minute tongue-lashing would follow, in which the caller was told “no.”
I guess maybe I’ve been doing it wrong, because in all of these years I’ve never told a client that he/she couldn’t spend money on something, much less lectured them about their manifest financial irresponsibility for even asking. Your money; spend it on whatever you want to. Neither my job nor my prerogative to tell you that you can’t.
Though in fairness to the host, in every case the person doing the asking really didn’t have the sort of financial position where the frivolous extras being batted about were a real good idea. Ending up with more money in your bass boat than your 401(k) account is not broadly understood as a step in the right direction.
Well, rather than dragging us into all of that, how about I just tell you instead how to figure out the answer for yourself. This is actually a pretty quick one.
Most people come at the question in a form that resembles, “I wonder if it would be OK for me to spend $5,000 on a vacation?” Or $10,000. Or a horse, instead of a vacation. Or whatever.
Point being, they pick a dollar amount and a target for the money.
Let me suggest a different approach.
Assume that what you make in a year equals 100. Further, let’s stipulate that by the time you finish paying the bills (including your taxes) and enjoy a bottle of wine here, a steak there, few other little extras, you’ve gone through, say 75. On top of that, you’ve determined that you need to be putting back 14 every year towards retirement.
So all else being equal, once you’ve met the basics plus a little, you’ve used 89. What about the other 11?
Whatever you want. It’s your money.
Return to your initial question: is your personal version of “11” enough to pay for that thing you were asking about?
In other words, don’t ask the question without any real context on the situation. Instead, make a rough sketch for what you might have to work with first, then start considering the specifics of how to allocate it. Much easier that way.
Also, understand that the problem with pressing the “expert” to just-answer-the-question comes down to the fact that this is a nuanced matter, hanging squarely in between a pair of oppositional forces which we have now discussed on several occasions. Simple answers to complex matters are seldom helpful, so it’s best not to even go down that road in the first place.
It is quite literally the case that every dime you spend pre-retirement is a dime that will never earn you a return, nor be available to spend once you do retire.
But it’s also true that it is mighty hard to live a life in which you ascetically beat the joy out of every little thing.
Civility and even enlightenment seem to make a soft plea for some middle ground, here. So how much middle ground is there to actually work with? Reference above calculation.
The reality is that you will probably never be able to state with certainty that it is perfectly OK to blow some money on something you don’t need. In other words, to say “of course I can afford this, and there will never be even a hint of negative ramification in the future.” Not if it’s more than a couple hundred bucks.
But you can certainly come to an understanding, pretty quickly, that you really can’t afford it. At least not at the moment. That’s the more important finding.
Beyond that, even if it looks like it won’t wreck you, you may decide that using a bit of the extra to do a little extra on your savings contributions this year would end up giving you just as much satisfaction as the other thing. That also sets the stage for the potential of bigger excesses in future years.
Either way, it’s really not that hard to figure out. So you figure it out. After all, it’s likely to come up again in the future, and the TV guru might be off on an ostrich-watching junket, or flying around in a hot air balloon, or something; and in the end you’d just wind up having to decide for yourself, anyway.
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