Achieve Financial Freedom by Asking Yourself This Before Buying Anything Significant

As a Whole, We Have a Problem…

As Americans, we have a problem. A big one. It shows up in our low saving rate (down by almost half relative to what it was in the 60s, 70s, and much of the 80s), in our out-of-control debt (average consumer debt is ~55% of the median US household income, based on data from here, here, and here), and in the fact that 60% of us would be unable to come up with $1000 for an emergency without borrowing it.

You could blame this on how wages haven’t really moved much after accounting for inflation over the past few decades, while college tuition and cars (two major types of consumer debt) have increased dramatically.

You can blame it on the huge number of ads we’re bombarded with — in 2015, the estimate was between 4000 and 10,000 per day, and I’m pretty sure that if things have changed since, it wasn’t for the better.

You could blame it on the limited and mostly ineffective financial education most of us get, if we’re even lucky enough to get any. After all, in a society where the median net worth of people aged 65–74, is just $224,100 , are most of us even qualified to teach anyone how to behave financially?

Keep in mind that if you have $224,100 in a conservative portfolio and don’t want to outlive that money, you can only withdraw $747/month for expenses. If that $224,100 is your entire net worth, and you own a home worth as much as the median home value in the US, or $226,800, you have no retirement nest egg, because your financial “assets” are actually a debt of about $2700.

Your Personal Problem

If you haven’t been living under a rock for the past decade or two, none of the above should shock you, and I’m pretty sure you’d rather not fall into those kinds of statistics, right?

But every day, you have to make financial choices. Lots and lots of them. Do you buy a shirt, or a pair of shoes, or a TV, or a car, or a house; and if you do, which one should you buy out of all the options being pushed on you.

Enter the financial gurus. These good people rant at us that we should live the most frugal lives possible, scrimping, not buying a latte at Starbucks, brown-bagging lunches, and of course never eating out. They insist that we should use every possible dollar to pay down our debt (even our mortgages, which makes no financial sense for most of us). Of course, it’s probably not too difficult to tell people to live like that when the pilot of your private jet is whisking you off to your very own private tropical island.

But maybe they’re actually right. Perhaps we should live as virtual slaves to our future selves. Isn’t that the moral of the story of the grasshopper and the ants?

I recently read a piece arguing against frugality. The author made the point that slaving away just to set money aside for retirement means that you end up not enjoying your youth, when you’re in the best shape to travel, party, etc. By the time you have enough to retire, she argued, you’re often too sick and physically limited to do a lot of the fun stuff that life offers. Taken to extreme, this is how the grasshopper in Aesop’s fable lived during the summer. But then winter struck and, starving, he had to beg the ants for help.

Your Golden Mean

This leads us to my main point. The ancient Greek philosophers were great believers in the “Golden Mean.” The middle road between extremes. For example, being undeterred by any threat would make you reckless. On the other hand, being stopped cold by the tiniest risk would get you (justifiably) labeled a coward. However, if you find a good middle road, where you’re willing to take calculated risks, and when the stakes are high enough, you’d run into a burning building to save a child, well, then you’re a hero.

To build financial success requires you to find your own fiscal golden mean. You need to find the right balance between spending enough to enjoy your life in the present, at every age, while setting enough aside to help your future self avoid the grasshopper’s fate.

The simple question you should ask yourself before making any significant purchase is this:

If I put myself a day, a week, or a month in the future, will having made this purchase make me happy, or would I regret spending the money that I could have instead invested to achieve financial freedom?

When asking yourself that question, keep in mind that what’s at stake isn’t just the number on the price tag of what you’re thinking of buying. It’s that number plus all the dollars you’d end up with if you invest the money instead.

Assuming an average annual return of 7%, a single dollar invested when you’re 57 would almost double by the time you’re 67. A dollar invested at age 47 would become almost $4. Invest that buck at age 37, and you’d have over $7 when you’re 67. Invest it at age 27, and it’ll grow to $15 by then. Thus, if you’re 27 and looking at spending $1000 now, that purchase will reduce your retirement kitty by $15,000! That’s enough to give you an extra $600 to spend every year in retirement, according to the 4% rule. Still want to spend that $1000 now? Maybe, but maybe not.

The reason I suggest asking the above question only about significant purchases is that will power is a limited resource. The more decisions you make throughout your day, especially ones where you’d rather do what you know isn’t a good idea, the more difficult it becomes to keep making good choices. You have to choose your financial battles wisely. Don’t waste your will power on saving $4 by not buying a latte, if you love those. Instead, spend that will power when deciding if you’ll buy a house, and if so, which one. Spend it on choosing whether or not to buy a car, and if yes, which one, and should it be used or new.

What do you ask yourself before buying something significant? Are there big purchases you now regret that you would have avoided had you asked yourself to put yourself in your future self’s shoes before pulling the trigger on that purchase?

What Do the Financial Pros Think?

I asked several financial pros to weigh in on this topic. Here’s what they say about how they help their clients calibrate their spending.

Terri Bailey, MS, AFC^®, Daily Financial Success says, “I often ask my clients, ‘How does this purchase align with your goals?’ I love this question because it puts the responsibility back on the client, allowing them to be the driver in the process and reminding them why they started working with me in the first place. It starts and ends with goals!”

Joe Petry, PhD, CFP^®,Founder and Financial Planner, Mayfair Financial asks his clients a variation of George Kinder’s three questions, “(1) If you won the lottery today (say a hundred million dollars), what would you do differently? (2) If your doctor just told you that you have a terminal illness and you can have an active life for five to10 years, but then you’ll die suddenly, what would you do differently? (3) If you knew you had just one day to live, as you reflected on your life, what you would most regret not doing or becoming?” Then, he continues, “This discussion makes it much easier to help clients consider the importance of major financial decisions. When and why did I decide this purchase was a priority? How does this purchase fit with the values and goals I have stated for myself as a part of the financial planning process? Can I delay this purchase for a month or two to evaluate whether it’s a want or a genuine need?  If I had to give up something of equal value to make this purchase, would I? What would I give up? Will this purchase enhance my skills and abilities, lead to personal growth, or enhance important relationships in a significant way?”

Bernstein Investment Consultants says, “Balancing finances isn’t about denying yourself enjoyment now, but about balancing your present contentment and future security. Identify your priorities, set your financial goals, and remember to spend mindfully. Your budget isn’t a cage. It’s a framework for freedom. Balance is key in the dance of personal finance. Create a ‘Fun Fund’ for your solo moments and never lose sight of the beat of your financial goals. Finally, review your moves regularly and adjust to the music of life as it changes. Remember, the goal is not to sit out today’s dance but to find joy in every step, today and tomorrow.”

Marianne M Nolte, CFP®, Imagine Financial Services says, “Get serious about the impact of impulse buying. Ask yourself, is this purchase essential or not? If you think it is, buy it tomorrow. This lets you confirm your belief that it’s indeed essential. If an item is non-essential and you aren’t sure, leave it in your cart for a few days. When you return to it, you may find they no longer hold much appeal, which will make it easy to delete them. If an item you put in your cart doesn’t add value to your life, don’t do it! You may have simply put it there because you were frustrated and participating in ‘retail-therapy shopping.’” 

Joseph Brown, PhD, Financial Planner, Ahead Full Wealth, says, “The first thing to do when deciding if you should buy something is to determine if it is a ‘need’ or a ‘want.’ After you do that, if it’s a ‘want, ’ask yourself if you can afford it given the money you have left after meeting all your needs. Getting clear on your values and goals, aligning your money with those values and goals, and having an accountability partner will help you make sure that you’re balancing your long-term needs with your short-term spending. This is where a financial professional can add massive value by helping you find the correct balance.”

Kerry ‘Kiki’ O’Brien, CFP®, EA, Founder, Financial and Tax Advisor, BeingFIT Financial, LLC says, “It all starts with getting clear on typical monthly fixed and flexible expenses and identifying those that are meaningful to support your ideal lifestyle. Current spending, along with any irregular expenses or other financial and investing goals, helps determine your personal target savings rate needed to maintain your lifestyle in retirement. Then, we add a third ‘fun’ bucket. I find that it doesn’t matter how small that monthly fun bucket may be. It’s the ‘permission’ to regularly spend on anything that brings you joy that helps you stick to your plan. Having a clear system also ensures you don’t feel guilt for meaningful or fun things you bought because you have confidence in the plan. If your fixed and/or flexible expenses are lower than usual any given month (or year), you can add the excess to the fun bucket for the month (or year). This creates an incentive to reduce unnecessary and/or wasteful spending whenever possible so you can afford more of what’s meaningful to you!”

Jacob Yocco, CFP®, Director of Financial Planning, Cardinal Retirement Planning  wraps things up, saying, “I often find my clients fall into two groups, over-spenders, and penny-pinchers; rarely do I find people between those two extremes. I’ve found the key to working with either type of client is honing in on goal identification and prioritization, and then building a budget to fund those goals. I often have conversations with clients regarding ‘permission to spend.’ You work hard in your career and you should allow yourself to enjoy your hobbies or other wants today and not just 20-30 years from now, assuming that it’s all properly budgeted for and that you’re still adequately saving for retirement.” 

As you can see, there’s a lot of good advice here and, unsurprisingly, a lot of agreement.

Take whatever you find useful in all the above and apply it to your life to best balance enjoying the present with preparing for the future.

Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel

My career has had many unpredictable twists and turns. An MSc in theoretical physics, a PhD in experimental high-energy physics, a postdoc in particle detector R&D, a research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started several other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. I draw on these diverse experiences to write about personal and small-business finance to help people achieve their personal and business finance goals.

Follow me on Medium (opher-ganel.medium.com).

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Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.