It’s time to come clean: We’ve done a lot of unnecessary spending in the past year. It started last August, when we moved out of our perfectly good, paid-off condo in Gainesville, Florida, and bought ourselves a fancy beach home for $204,000 instead.
Sure, we had enough cash to pay for it, and we turned the old place into a rental unit, but still…Those are just excuses. We absolutely didn’t need to upgrade, and we went through with it anyway.
It gets worse though. We like the place so much that we just convinced ourselves to blow another $12,000 remodeling our back porch.
If the 2013 versions of ourselves heard about this, they’d probably be appalled. Yet somehow, we don’t feel any remorse. So, how did two otherwise frugal people end up making such lavish purchasing decisions? What does it mean for our early retirement? And, is there a secret to spending on things you want without backtracking on your financial goals?
Unnecessary Purchases in Strategic Categories
All extraneous spending isn’t equal. One important differentiator is depreciation — how quickly an item’s value deteriorates over time. There are two ways to think about it: resale value and useful life.
If you buy a $5 pack of balloons at Walmart, blow them up, and use them for a party, they really have no resale value afterward. On top of that, they’ll end up in a landfill in just a few days, so they have a super short useful life as well. This is an example of the worst-case scenario when it comes to depreciation.
When you buy a $5 hammer, you’re probably not expecting to recoup the $5 by selling it in the future — a hammer doesn’t have a great resale market either. But once you buy it, you can wield it forever. It never gets “used up,” so it’s not completely a depreciating asset (unless you have no need for it ever again).
An item like a nice used bicycle is the holy grail though. If you buy a quality bike second-hand for $350, you can probably resell it at any time for the same amount you originally paid. And with proper maintenance, it can last forever. My current bicycle was made in the 1990s, and it’s still as good as new.
Depreciation is an important factor to consider when buying stuff, but smart spending habits go beyond that. Not everything is as cheap as balloons, hammers, and bicycles. The real danger comes when the price is higher. The more expensive something is, the more you’re giving up by buying it — even if it has a low rate of depreciation.
Combining the factors of depreciation and price will give you an estimate of the true cost (including opportunity cost) of a purchase. Remember, every extra dollar you spend could have been used to pay off debt or invest instead — and those financial benefits are what you’re giving up when you make unnecessary purchases.
Take our beach home for example: We bought it for $204,000, when we could have easily stayed in our old condo (valued around $115,000 at the time we moved) instead. That represents a very frivolous $89k upgrade*.
Typically, real estate isn’t a depreciating asset. In the long run, homes actually appreciate in value around 3-4% per year on average. So in some sense, you could say that we really didn’t spend anything on our new house — the value is still stored in the form of home equity, and we’ll recoup that money when we sell one day.
That’s true — until you consider opportunity cost. The extra $89k tied up in our home could have been invested in a stock market index fund instead, which has historically returned 10-11% per year. So we’re losing out on those potential returns by living in a fancier place**.
Moving into a more expensive house definitely isn’t lighting money on fire like buying a new car, but it’s still financially worse than living somewhere more modest and investing the difference.
The same could be said of our back porch update: It’ll add some permanent resale value to our home and serve us well for years to come, but let’s not kid ourselves — we will probably be poorer in the long run compared to a scenario where we invested that money instead.
So, why’d we do it?
Buying Freedom First
As I mentioned earlier, past-life, 23-year-old, full-time-working Steven and Lauren wouldn’t have even considered buying $89k more house than we needed, or dropping $12k on some extra outdoor space.
That’s because when we were 23, we still hadn’t bought our freedom yet. We were laser-focused on saving and investing enough money to never have to work again. We wanted a lifetime of unlimited choices without alarm clocks or bosses. Almost nothing seemed more important.
Sure, we bought some stuff we didn’t need during our full-time work years, but we tried hard to keep most of it in the “inexpensive” or “low depreciation” categories.
The biggest unnecessary purchases we made during that time included used professional photography equipment (which depreciates slowly and helped us make more money), collectibles like Magic: The Gathering cards (which appreciated in value), and long-term travel (which we did as cheaply as possible, although it admittedly slowed down our saving some).
By spending strategically, we were still able to enjoy some luxuries in our 20s without sacrificing our long-term financial goals. That allowed us to quit our full-time jobs for good at age 29.
Now that we’re retired, we’re able to enjoy our 30s, 40s, 50s, and beyond however we choose. We bought freedom from mandatory work before indulging in big, frivolous things like beach houses and back porch upgrades.
If we were living off of our investment portfolio, we’d still need to be careful about spending. But our retirement has actually turned out to be more of a “semi-retirement.” We still do a tiny bit of freelance work that pays a high hourly rate. This has allowed us to avoid tapping our investments for income at all — leaving us with a bunch of excess income that we don’t really need.
A lot of young retirees end up in a similar situation: Doing zero work can get boring, whereas doing a small amount of it hardly feels like work at all — so it’s natural to keep earning a little and to end up with extra money.
When you’ve already bought freedom from mandatory work with your investments, all that extra freelance income is just gravy. We still save and invest a lot of it, but we also don’t feel bad about blowing some on unnecessary home improvements, or giving some away.
Back to Basics
When you get right down to it, all spending that doesn’t help keep you alive is superfluous. And the other stuff that’s truly necessary for happiness costs nothing: love, family, friendship, and nature.
Realizing this simple fact can help you cut your expenses painlessly to become rich and free early in life. We have no regrets about our decision to spend less in our 20s to retire early. The freedom we gained was worth far more than anything else we could have bought instead.
If you don’t have enough money to ditch mandatory work forever yet, consider making that your top priority. You may be able to get it done way faster than you’d think. Along the way, it’s okay to buy some unnecessary stuff, but try to do so sparingly and make every purchase really count. Just keep in mind the freedom you’re giving up in exchange each time.
If you’ve reached financial independence already, don’t feel too guilty about spending any extra income you make on things that bring you value every day. But never lose sight of the fact that a simple life is all you ever really needed. We love our beach house and our new back porch, but they’re also just extras — icing on a cake that was already delicious.
— Steven
* Hypothetically, if we sold the old condo for $115k and bought the $204k beach house in its place, we’d need to cough up an extra $89k. That is the easiest way to do this analysis. If you’re curious what actually happened: We kept the old condo as a rental unit and sold some stock to help pay for the new place. But this doesn’t really change anything. The bottom line is that we now have more capital tied up in our primary residence than we used to, and that represents an opportunity cost any way you slice it. This gets a little more complicated if you make use of leverage through a mortgage instead of paying cash like us, but the main argument still stands.
** You might be tempted to point to a time when you’ve seen real estate appreciate way faster than 4% per year. In fact, our Gainesville condo’s market value is up about 85% now since we bought it (over 12% annualized). But it’s important to realize that this is just dumb luck. When making choices about the future, it makes more sense to use historical averages than to fixate on bursts of good fortune. Incidentally, it’s also worth noting that the US stock market still beat our condo’s return, even during this hot streak!
