From Frugal to Fancy to Buying a Peloton
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Financial success often means learning how to be frugal. Is it okay, once you've had success to go from frugal to fancy? We did after buying a peloton.
Today’s Classic is republished from Physician Philosopher. You can see the original here.
I’ve spent a lot of time over the last 3 and a half years teaching other people how to start and stay frugal. As a result, it became tough to loosen the purse strings for my family even after we were having substantial financial success. Is it ever okay to spend more of the money you are making? Or are we required to simply squirrel away any extra dollar that we earn? I’ve been learning that going from frugal to fancy can be tough once you’ve built those strong frugality muscles that allowed you to say no to the many things you didn’t need in order to achieve financial independence and avoid trapping yourself in your lifestyle.
How to Become Wealthy
Becoming wealthy and financially independent involves a pretty simple equation. There are only four steps, particularly while in training and for the first few years thereafter.
- Earn a good paycheck.
- Spend substantially less than you earn.
- Save the difference (at least 20-30%).
- Put that extra money towards building wealth. (i.e. pay off your debt and invest the money you’ve saved so that your money starts to work for you).
While this is a simple formula, it isn’t easy to accomplish.
The reason this simple equation is difficult to enact is that financial success is 90% behavioral finance and only 10% knowledge-based. Knowing what to do is not enough. You have to follow through with discipline and – since we are all prone to behavioral finance mistakes – get out of our own way. That’s the hard part.
Yet, once you figure all of this out, there is actually a 5th step in the equation, that is much more enjoyable:
5. Once you are achieving your financial goals, enjoy the rest!
Spend Lavishly On The Things You Love
After you are meeting all of your financial goals, I believe that you should spend lavishly on what you love. It is okay to go from frugal to fancy.
Now, don’t put words in my mouth. You still need to pay your future self first, make sure you are saving enough each year, and that your debt is paid off.
If you are in the beginning stages of accumulating wealth after training, use The 10% Rule to limit your lifestyle creep. Enjoy 10% of any increase in pay – including the difference between your last paycheck in training and first paycheck as an attending each month – and spend it on whatever your heart desires. Then, use the other 90% goes to pay off your refinanced student loans or towards your annual savings goals.
We used The 10% Rule to increase our net worth by ~$500,000 in a little more than 2 years after training. Much of that involved paying off our $200,000 in student loans, $75,000 in car payments, and some other minor debts.
Once all of that debt was gone, we noticed that we had substantially more cash flow at hand. We began to ask what we should be doing with all of this extra money? I guess that’s why they say “Cash flow is king!”
When The 10% Rule Becomes The 20% Rule (or More)
Personal finance is personal.
For us, financial freedom means becoming financially independent in our mid-40s. We don’t have any desire to limit our lifestyle further to achieve financial independence at age 40 instead of 47. It just isn’t worth it to live like paupers. Instead, we would like to enjoy today AND become financially independent early in our lives.
When I looked at our annual savings rate, which is north of $115,000 each year, I realized that we were going to achieve our FI number by our mid-40s even with conservative estimates. And those numbers didn’t include any additional income I am bringing in from The Physician Philosopher.
So, this Christmas we let the purse strings loose in a way that my wife and I have never experienced in our 10 years of marriage. When deciding what to spend this money on, we decided to spend it on our family’s health.
This included a top-of-the-line rectangular trampoline for the kids (yes we are crazy; yes it has a sturdy enclosure; yes the kids have specific rules to limit injuries). They love it and have spent hours jumping on it already. It’s good to see them get outside and get some exercise.
Even after those purchases, we had money left over in the budget that my wife and I created. In fact, we had so much left that my wife and I decided to join the Peloton Cult Club. Our bike arrives a couple days after this post goes live.
The best part about it all was that there was zero guilt and zero financial stress. We had more than enough left over even after our spending spree was done.
When Is It Okay to Spend More?
In order to not derail this personal finance blog that has been built on frugality and strong financial discipline, I thought I’d outline the things that I recommend you take care of prior to going from frugal to fancy in your household, too!
#1 Make Your Financial Plan
Realize that when you start spending more money, it becomes much easier to spend even more. For this reason, before you begin your journey from frugal to fancy, please make sure you have sat down with your loved ones and made your life plan.
From your life plan, your annual savings goals and other financial plans will naturally flow. If you haven’t done this yet, then you don’t know how much is “okay” to spend. Don’t skip this important step.
If you need professional help to create your personalized financial plan, check out the list of The Physician Philosopher’s recommended financial advisors.
#2 Pay Off Your Debt
You will notice that we paid off most of our debt before expanding our lifestyle with some of these big purchases. The only debt we have left at this point is our mortgage, which we intend to pay off in 10-15 years (instead of the traditional 30).
I don’t encourage anyone to loosen the purse strings too much until your debt is paid off. Otherwise, you’ll likely cause unnecessary financial stress (and worsening burnout when you feel trapped in a lifestyle). The best way to enjoy spending more money is to do it guilt-free.
#3 Achieve Your Annual Goals First!
You should not be spending money that you aren’t sure you “have”. In order to avoid this problem, you need to make sure your annual goals are accomplished first.
For my family, this means automating/achieving the following annual financial goals:
- Giving at least 10% of our pre-tax income to other people and to charity.
- Saving at least $115,000 annually
- Funding our kids 529 plans for college (an additional $15,000 annually)
Going forward, any additional money that we have coming in will likely be split into various things like a travel/vacation fund, paying off the mortgage sooner, and charitable giving. Or, we can spend it lavishly on whatever else we want guilt-free!
#4 Spend the Money Wisely
Remember, that there are studies on how to spend money in a way that provides the most long-term sustained happiness or satisfaction.
The take-home when it comes to making sure you are getting the best bang for your buck is to do the following.
- Spend money on experiences over things.
- Give the money to other people or charities.
- Buy smaller and more often (we screwed this one up with the peloton purchase, oops!)
- Delay purchases to make sure it is really what you want! Do your research, and enjoy the experience of buying “stuff” if that is the direction you go.
It is okay to spend money. You just have to make sure you have taken care of business before you go from frugal to fancy. If you are still in the midst of paying down student loans and/or you just finished training, I encourage you to adhere to The 10% Rule for the first few years out of training.
If, however, you’ve done the hard work to get your financial house in order, then you should enjoy your money guilt-free. There’s nothing wrong with going from frugal to fancy. Just remember to achieve all of those financial goals first before spending what is left.
And when you do spend the money, spend it lavishly on the things that you love and that you know will provide you the most long-term happiness and satisfaction.
Did you have a hard time loosening the purse strings after you were making great financial progress? Are you still in the throws of financial hardship? Leave a comment below.
Disclaimer: The topic presented in this article is provided as general information and for educational purposes. It is not a substitute for professional advice. Accordingly, before taking action, consult with your team of professionals.