The Price Of Luxury

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.


27 Responses to The Price Of Luxury

  1. […] the rest here: The Price Of Luxury | Brave New Life ← The Way to Pick the Proper Perform at – PMP Exam Prep and PMP … Smart […]

  2. Poor Student says:

    This is a very similar situation to mine. I bought a $400 bike (a lot for a kid and have kept it for six years maybe. Lately all the little noises it makes which I used to consider character have gotten louder and I am worried the next long ride I take I will be walking home. So I am trying to rationalize spending two weeks of work (much lower pay than you) on a bike when I know that the same $800 I would buy the bike with would otherwise by shares of a good stock and pay me for the next 50 years. I need a bike, so I will end up buying one, but thinking of the dividends and interest I am giving up still hurt.

    • ” but thinking of the dividends and interest I am giving up still hurt.”

      Yep, that’s exactly how my mind works also. This is why approaching a “retirement” date helps me trick my own brain by getting me to think in work-week units.

      Like you, I can’t help but think: $1000 means giving up $50 / year (and rising) for the REST OF MY LIFE! I can’t do that!

      And while I think this is a healthy fiscal practice, it can reach a point of unnecessary deprivation, and I’ve certainly been guilty of that at times. But when I think of it in terms of a 1-time expense that can be paid for in work weeks, then I can become more rational.

  3. Gouldee says:

    Great post.  I realize you main point is about the financial implications luxury purchases but am interested to hear more on your choice of bike. It’s a great looking mountain/ downhill bike, did you also consider a hybrid or roadie?

    • Well, currently I have 3 bikes – a road bike (1992 Specialized Carbon Epic), a mountain bike (Rocky Mountain Trailhead), and a hybrid (a Fuji something…).

      Because most of my commutes have very few bike lanes and drivers here aren’t the most bike-friendly, I’m usually hopping on and off side walks, cutting over rocks and grass, and maneuvering potholes. So the road bike is useless for that and the hybrid gets way more flats than I’d like, even after putting on some wider tires). The mountain bike, on the other hand, hasn’t had a single flat in the past year.

      The bike I linked too is a dream bike for me when it comes to recreational mountain biking. After all, I live in the foothills of the rocky mountains and soon will have a lot more free time. On the other hand, it’s probably overkill for my road/sidewalk commuting, and its soft tail will probably just result in a lot of wasted energy.

      I noticed from your link that you are a “passionate cyclist” – would you have any suggestions for me and the riding I described? I’d like to get down to two bikes at most…

  4. m741 says:

    I’ve actually thought about it in the same way. You can make some really high-quality purchases once you’ve covered your dividend income. Right now, the things I’m thinking about saving up for after reaching my FI goal are: some good backpacking/travel gear, funds to move across the country, enough funds to travel for a year or so, and money to pick up a good set of basic power tools (I only have a drill right now, since I live in an apartment).

    • Good list. I forgot about the backpacking and camping gear – I may have to add that in.

      The power tools are a good idea as well. I’ve actually already begun collecting some good tools, but I’m not considering them “luxury” spending since buying the tools has already begun helping me to save money since I can do things myself rather than pay for someone else to do it for me. In other words, they are one of those manly luxuries that can rationally be viewed as an investment if you really do use them.

  5. Alice says:

    Your applying the “Your Money or Your Life” principle here. Having been in “choosing to work” mode for several years, one thing I’ve learned about luxury purchases is that they have ongoing costs associated with them, so don’t forget to factor that in. I also built 3-5K per year into my budget for house maintenance and something always comes up to take a chunk of that. Oh, and being home more means I see more things that I want to do to the house!

  6. I think of purchases in terms of how many hours I’d have to work to justify them. I like your approach better. “Let’s put the last few months of my income to something useful!”

  7. Hmmm, Brave.. I definitely agree with the wise lesson you are presenting in this post. But I’d say it’s a stretch to apply it to your own situation, because you’ve already greatly over-saved for retirement!

    Way back on October 11th, you posted this: http://www.bravenewlife.com/10/on-becoming-a-millionaire/

    Around the same time, you posted monthly expenses that would annualize to about $30k: http://www.bravenewlife.com/11/retire-by-35-october-2011-results/

    So, even at a 3% withdrawal rate, you were covered long ago (and I think a 4% withdrawal rate is extremely safe): http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

    Plus, even your previous retirement schedule has you retiring well over a year after that October post. Meaning assets will be at least 10% higher.

    Plus, some of your mortgage payment is actually principal, and this entire payment will disappear eventually.

    Plus you will surely earn income even in retirement.

    The Lesson? I think you should have quit a while ago. Don’t you dare work longer just to buy a ridiculously expensive brand-new mountain bike (ever heard of Craigslist?) and a Prius (which will cut your monthly gas budget, thus effectively costing zero).

    Also, I can help you install those windows if you like – save you a few grand :-)

    • Pretty much everything I own is from Craiglist – including my last two bikes (got my Specialized Epic for $200 on there!). So don’t worry, I’m not really going to buy a brand new $4500 mountain bike – but I am going to get a very nice one nonetheless – very likely from Craiglist.

      You make a compelling argument, as usual, MMM. I may have mastered the frugality and savings of a Mustachean, but embracing the lifestyle and freedom is something I have much to learn. I’m all too often stuck under the spell of the expensive illusion of financial safety. :)

      Now… I just spent the last 10 minutes writing this long rebuttal to you about myself, personality, and exact situation – basically telling you why you are wrong – and then I realized it was filled with excuses, over-conservative thinking, and then a few more excuses. So I saved face and deleted it.

      I just might have to take you up on the window offer. I assume I can pay you in burgers, beers, and bike rides?

      • Now you’re talking! Instead of working longer, you can invent other mental games to make yourself confident after retirement (“I’m going to bank 100% of my dividends, but let myself spend next month’s optional online income on a mountain bike”), stuff like that.

        Regarding those windows – send me an email when you are ready to think about it. I can tell you how to do the measuring and ordering in advance, then I’ll head down there and we can install them all in one day. And make a story about it for the blogs too.

  8. DB says:

    Enjoy the website and wish you luck. I’m going down a similar path. This last post of yours contemplates my biggest worry. To sum it up, isn’t it a fallacy that once you get this new bike, or this new prius, you’re going to be all set? In eight years you want new windows for the rest of the house, what will you do? Same for the next road bike when this one is old, the next new car, the kids’ bikes, etc. I understand that you have enough passive income to pay your expenses, and it seems that you have even more coming in that you could save for these bigger purchases (plus side income). But for those out there who will not have such a cushion, I wonder if there would be down the road a remorse that some new things (not mass consumerism, but just a few occasional nice things) are now unattainable.

    • You are right that I won’t be “all set” for a lifetime once I get the new bike/Prius/etc. since those things depreciate. This is why I clarified by stating that I’m looking at a 10-year timeline. After that, I expect my dividend income to increase significantly (double or more, I hope) such that I have plenty of discretionary income. So when I refer to “1-time expenses” I am only looking at a 5-10 year horizon.

      10 years from now, I fully expect to be raking in significantly more than I spend. In fact, my goal is that in a decade from now I’m back to a 30-40% savings rate on income that I’m earning passively through my current investments.

      As for your question on remorse, here are my thoughts:

      1. For someone creative and inspired, it’s really not that hard to make money without a “job.” The beauty of frugality is that even small amounts of income (a few dollars a day) is significant. I’m constantly making money through side projects, mostly online. Compared to my day job this money is chump change, but when considering my low expenses, all of a sudden it becomes significant. Take this blog – which is not remotely monetized the way it could be – without even trying I’m probably close to $1000/year. I have another dozen ideas of things I could and might do online for fun that would result in far more income, mostly just because I enjoy the challenge of it.

      2. Retiring early doesn’t have to be a permanent decision. If, in 5 years, I decide this whole early retirement thing was a pre-midlife crisis fad and I want to go back to work, I easily could. I’m an introvert and not exactly the ideal specimen of a networker, yet even still I’ve built up relationships such that I could email a few people and get a job. As long as your a good person and good at what you do, I see no problems returning to work if it turns out to be a mistake.

      3. If I want some additional discretionary income and decide it’s worth it, there are plenty of part-time jobs available that don’t pay a ton, but could easily pay for these types of expenses in the future. Heck, I just looked a few days ago and found some jobs I could do for 10-15 bucks an hour. I could do that for 6 months at 20 hours per week and build up a nice little savings account for another few years of luxury purchases. I don’t intend to do that, but it’s nice to know it’s there.

      In other words, the decision to quit working once you have adequate savings is easily reversible. I don’t expect to reverse it, but knowing that I can is what allows a financially conservative guy like me to digest the idea of turning down hundreds of thousands of dollars of future income for the free time it gives me back.

  9. Da55id says:

    enjoyed the post. What you are describing is pure unadulterated marginal utility. IMO you are saying that after having purchased the sufficient marginal utility of continuing unearned income streams you want to acquire for cash the additional so called luxury items by exchanging weeks of life labor. At some point you will reach diminishing returns on marginal utility – like 3 months?

    Interestingly, this way of thinking is how all kids think before they discover taxes, mortgages and such. I got my allowance, now I want to buy that comic book 😉

  10. Doug says:

    I have also been trying to resist the urge to splurge on a new mountain bike, so far so good thanks to yours and a couple other pf blogs. And if I was going to take the plunge I was looking at this one: http://www.santacruzmtb.com/company/index.php?NewsID=0207. You might want to look at some 29’ers when you are looking for bikes on Craigslist. Thanks I enjoy reading your blog.

  11. Joycelynn says:

    BNL,
    Thank you for all the great insights and inspirational stories. My weakness is traveling – I have a severe case of the travel bug but try to temper it by automatically saving a small amount in an account each year so that I safely stick to the limits I’ve set for myself. Part of the reason for the need to escape, besides the love for visiting and discovering new places, is that I am stuck in my own little hamster wheel (aka a cubicle) but through sites like yours and ERE, I am making progress toward my own goal of retiring by 38. :)

  12. John says:

    You could do what my Senior Semi-retired engineer reviewer is doing now, he works Tues-Weds-Thurs Only, 8 hours a day, 24 hours a week. For me to do this now, it would reduce my savings by $18k a year, compared with a goal of $30k. So it would postpone my Extreme Early Retirement, but kind of dip into the pool of how it feels. Though it takes more frugal discipline to have extended weekends, because it may always feel like weekend vacations, when you truely could not afford to do so. You could taste the cake, before pure consumtion.

  13. John says:

    Here’s some Motivation for Early Retirement from Dividendmantra’s blog:
    1) Just Say no to the Alarm Clock
    2) Be your Own Boss
    3) Long-term Travel (trust me Japan, Europe, China, Australia is wonderful)
    4) Spend More Time with Family and/or Friends
    5) Cultivate yourself Through Hobbies
    6) Limited only by your Immagination
    7) More probability to take Risks and Generate millions from a future successful business or invention, now that you have all the Time in the world to learn from mistakes and educate yourself on anything (imagine taking free MIT, Harvard courses online, 5 courses per semester for 20 years straight!)
    8) Easier to cultivate your needs through Autonomous, Self-sufficient machines, aka getting off the grid.

    Drooling yet?

  14. John says:

    With Financial Independence and Extreme Mental Focus, you could…
    Learn to play the piano in 3 days,
    Use math in Poker,
    Learn a new language in 1 month
    Create a fun youtube subscription that thousands tune into each week.
    Become a senator who doesn’t need Money.
    Become the Next President of the United States who doesn’t need money and doesn’t waste it on unlimited wants.

  15. virginia says:

    Hello – I just recently found your blog and have been browsing some of your older posts. I’m just curious, does your wife work or does she stay home with the kids? I’m sure you’ve mentioned this but I am having trouble finding it.

    • Hi Virgina, welcome to the site.

      My wife worked up until my son was born in 2008. She’s stayed at home since, although she may return to some part time work in the future once the kids are in school and if the job is something interesting.

  16. I look at our purchases like that – 30 minutes of work for a lunch here and 1 week of work for a car fix there. We aren’t nearly as close to retirement as you though, so we think in these terms just to help us prioritize our spending. Right now, our new home is being built, so cash for padding is our priority, but after September, paying off our current mortgage will be our priority. No matter what, thinking about our spending in the terms of time worked keeps us on track. :-)

  17. joe says:

    You could probably think of many more one time things. I know a couple that only goes on vacation after they “earned” it. They are retired, but with no money budgeted for vacations. They take various oddball jobs 1-3 weeks when they are looking to travel.

    Can you explain (or point me to a previous post) how June 1 2013 came to be? Some say “1 million” (lame I know), 4%, 85% pre-retirement salary, etc. Thanks

    • June 1st is the 2-year anniversary from when I started my new job on Colorado. At the time, I agreed to a 2-year contract in exchange for them paying all my relocation fees (including the closing costs on my over-sized $400K McMansion). Since the fees were over $60K, and I’d have to pay them back if I don’t stay for 2 years, that became my default “retire” date.

      My total investable assets sit somewhere between 3% and 4%. Personally, I think 4% is a reasonable SWR, especially if you figure you’re naturally entrepreneurial in spirit and figure you’ll continue to make some nominal income in the future just for fun. That certainly applies to me.

  18. TrekMan says:

    You should buy a perfectly fitted bike regardless of if you choose to work more or not. A bike that is the correct size is more enjoyable to ride and prevents damage to your legs, knees and rest of your body. In the long run your decision to not buy a correctly sized bike might cost you money in the long run.

  19. Jennifer says:

    Now that’s a completely interesting concept altogether. My cousin is looking for a costly bike since last 2 months but since he hasn’t been financially established yet..he is hesitating a bit. Now I will suggest your tips to him to come out with a solution. Obviously we should and must meet our expectation keeping the budget in mind. Thanks for sharing.
    Jennifer Goldblum

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