Today’s episode answers the question: “When Is It Okay to Splurge?” Sometimes we get so entrenched in the mindset of paying down debt and saving money that we struggle with figuring out when it’s okay to loosen up a little and ENJOY some of our money. There is definitely a right way and wrong way to splurge.
When Is It Okay to Splurge?
• When I help people create a financial road map to get to their Preferred Financial Destination, one of the things I discuss with them is pace. I’ll ask them: “How fast do you want to get there?” Certainly, I want my clients to be financially healthy as soon as possible, but these things don’t happen overnight. I have clients who are very fired up about being debt free and they are eager to sprint to the finish line. I have other clients who want to travel this journey at a moderate, but constant pace.
• One thing I have seen with my clients who sprint, is that they can be in danger of burning out. I usually recommend that they take a 1 month break two or three times a year, and use some of their money to splurge on themselves. The journey to financial wellness is a marathon. I’ve had clients try to sprint too long, never splurging on themselves for long periods of time who end up falling off the wagon. This is why it is important to treat yourself and your family occasionally, even while you are in the process of saving money and paying down debt.
• Let’s first discuss when it is NOT okay to splurge!
• It’s NOT okay to splurge if you are in foreclosure on your house, behind on your rent or car payment, or past due on any of your bills. Your financial health is in grave danger and your top priority should be rectifying your negative cash flow and cutting all unnecessary expenses so you can bring your bills current.
• It’s NOT okay to splurge if you don’t have the cash to pay for it. NEVER charge your splurges on a credit card or put a vacation on your home equity line! This is why many Americans are in debt in the first place.
• It’s NOT okay to splurge if you don’t have an emergency fund of at least $1,000. This is your financial safety net and should be your top priority, even above extra on your debt.
• So, if you have a small emergency fund, you’re current on your bills, and you have the cash saved up for a splurge, what else do you need to consider before you treat yourself?
• First, ask yourself, “Will this purchase bring me joy? If so, for how long?” If you’re going to briefly put your dumping-debt plan on hold, make sure that you are going to thoroughly enjoy your splurge and not regret it later. Dr. Thomas Gilovich, a psychology professor at Cornell University who has been studying the question of money and happiness for over two decades, has discovered something interesting. Over time, people’s satisfaction with the things they purchased went down, whereas their satisfaction with experiences they spent money on went up. Gilovich says you’ll get more happiness spending money on experiences like going to art exhibits, doing outdoor activities, learning a new skill, or traveling with your family than you will with the latest iPhone or a newer car.
• My brother and I recently took my Dad on a golf vacation to the Greenbriar in West Virginia for his 70th birthday. We started planning this trip over a year ago, so we had plenty of time to set aside the money we needed for my Dad’s birthday trip. We had an awesome time, and I know all of us will continue to cherish the memories we shared together.
• If you decide to splurge on a thing instead of an experience, make sure that your splurge is something that you will either use frequently or that last you for many years – preferably both. I’d rather see my client spend her money on a piece of jewelry she’ll wear often and have for years than a trendy pair of shoes that will be out of style next year. One way to evaluate this is to consider the cost per use of something. For example, let’s say that Liz spends $500 on a pair of trendy shoes that she wears 20 times over the next year before they’re out of style. The cost per use of those shoes is $25 per wear. Now if Liz instead spent $2,500 on a pair of diamond earrings that she wears at least once a week – say 50 time per year – for the next 15 years, her cost per wear is only $3.33. And Liz will likely have those diamond earrings for more than 15 years! So do the math and make sure your splurge is worth it.
• Other things to consider when splurging: Plan your splurges in advance so you have adequate time to save up the cash to pay for them. Set goals for the things and experiences you want to splurge on and be creative about making and saving money to pay for them Shop around before you buy. The more patience you have, the more likely you will be to find a better deal.
• Consider the opportunity cost of your splurge. If you spend that $1,000 on a vacation, it means you can’t use that money to pay off debt or put in your IRA. What are you missing out on if you do that? If your credit card rate is 16%, this means you’ll be paying an extra $160 in interest this year by spending the money on vacation instead of paying down the credit card. The vacation is actually costing you not $1,000, but $1,160.00. I’m not saying you shouldn’t take the vacation, I’m just saying to be mindful of what you are forfeiting when you choose one option over the other.
• As I said, I do want you to splurge occasionally while you’re on your journey to your Preferred Financial Destination. If you follow the above guidelines when you do splurge, you’ll thoroughly enjoy the money you spend and won’t be plagued with buyer’s remorse.
Thank you for listening to this episode of Financial Lifeguard on Duty. As always, I am available for both in-person and virtual coaching sessions. You can schedule your financial coaching appointment HERE. I look forward to talking with you next time. Until then, have a great week!