I want a new mountain bike. The one I have is OK, but I want better. I bought mine for $700 back in 2003, and didn’t take particularly good care of it the first 6-7 years. I also bought one a tad too big for me, but it was on clearance and saved me hundreds of dollars for that small compromise. But since biking is my primary form of transportation and also one of my favorite hobbies, and since I make plenty of money, it seems reasonable that I would splurge on a new, high-end, perfectly fitted bike… But too often I’m cheap, and I never pull the trigger on giving myself something so perfect.
It’s no secret to any regular BNL readers that I’m planning to retire in about a year, with the expectation that my passive income can pay for all my family’s expenses, and hopefully a bit more. And as I’ve been nearing this date, it has me thinking about the true cost of discretionary purchases, such as my dream bike.
I look at my income as two water faucets streaming out water at a rate faster than I can consume it. One of those faucets represents my paycheck, the other represents my passive income through dividends, P2P lending, and other ways. Currently, the water rushing out is coming at a rate far more than I need, and so I just direct it over to a little reservoir (my investment accounts) so I have it later in case I need it. This is a great situation to be in. But soon, I’ll be turning off the larger of those two faucets (quitting my job) and I’ll only be able to drink from the second, smaller faucet.
So what does this have to do with the cost of discretionary luxuries? Well, although I’m not apt to luxurious discretionary spending, when I turn that second faucet off then discretionary expenses will no longer be an option for the first time in a long time. And I don’t like eliminating options.
But the thing about turning off the faucet is that it is, in itself, a choice. I can choose when to do it. I can quit the day my contract runs out in May 2013, or I can choose to work a bit longer.
So I’ve drawn a line in the sand and said that on June 1st, 2013 I will be financially independent and contractually free from my job. At that point, I can look at any luxuries (whether short-term or long-term), and choose whether to keep the larger faucet on a bit longer to splurge on those one-time purchases. And I can measure exactly how long I need to keep the faucet on in order to procure those luxuries. For example, if I assume my base expenses can be met passively through my investments on June 1st, 2013, then my paycheck is 100% available for discretionary purchases. Assuming my 2-week paycheck is around $2800, then that $4300 bike I linked above is 1.53 paychecks or, roughly, 3 weeks of work. Can I work for 3 more weeks in order to guiltlessly buy a bike that will give me huge amounts of joy for the next decade or two? Of course!
So this concept got me and my wife thinking about what other 1-time purchases (*) that we’d like to make before we turn off the primary income faucet and it turns out there are several things we’d like. And, unlike usual when I would just push off those discretionary expenses, my approaching end to employment is allowing me to view the prices of those luxuries in a new kind of unit: work weeks.
(*) Although you could argue they aren’t 1-time purchases, I’m viewing it for only the next 10 years. My expectation is that in 10 years my dividends will have grown enough that I’m bringing in significantly more than we spend, accounting for inflation.
- We want to get new windows in our bedroom and family room: 2 work weeks
- I want a high-end mountain bike: 2-3 work weeks
- We want to upgrade my wife’s car to a Prius (of course this will save money long-term): 4 weeks
- I’d like to build a small buffer for my planned HSA with a high deductable insurance plan: 4-8 weeks
- I’d like to have our house exterior painted (I’m deathly scared of heights, so I can’t do it myself…): 1 week
I’m sure more will come up over the next year, but right now it looks like I could work just a few months longer to fund these discretionary luxuries without any guilt of spending money unnecessarily.
With all this said, I don’t think you need to be so near to retirement/FI in order to view expenses in the unit of work weeks. Being close to retirement simply makes it seem more real. If you’re not approaching retirement in the next few years, I suggest you take the same approach and consider the true cost to discretionary luxury spending by appraising it in work weeks. As for me, I plan to add those 3-4 months of work on the back end of my “career” in order to live in luxury.
[EDIT] If you, like me, are looking for a bike but also can’t digest the idea of buying a $4500 bike – here’s a really great article on getting a used bike on Craigslist.