Is It Worth It?

I really like to frame every purchase I make a certain way. Outside of normal, recurring monthly bills like rent, groceries, my cell phone bill and the like I really try to make sure I’m completely aware of the costs of any item I buy. What I like to do, especially with an expense that will recur on an ongoing basis (like a car payment, gym membership), is to not look at the actual costs of the item or service, but rather I look at how much money I’d have to have saved up to offset that expenditure.

Follow me here for a second.

So, let’s say you get tired of working out in your living room and you determine a local gym has all the equipment you need and only charges you $45 per month. Not bad. $45 per month isn’t a lot of money, right? Well, let’s think about that.

As someone who is seeking financial independence, I am actively building my investments to the point that I can one day meet all expenses with the income these investments provide. What I do is look at every expense and look at how much capital I need invested to meet that obligation. I use a 3% yield as a conservative measure for this exercise. Why? Well, because the Trinity Study that showed that a 4% safe withdrawal rate is appropriate to have a good chance of not running out of money during retirement was used for more conventional 30-year retirements. If I actually meet my goal of retiring at 40, I’ll hopefully be retired a lot longer than 30 years! So, I scale that down to 3% to be conservative and give myself an accurate picture of my income. I’ll be living off my dividends in retirement, so my actual yield may be slightly higher than this.

Let’s get back to that gym membership.

A monthly expense of $45 is $540 over the course of one year. To meet that yearly expense, one needs to have $18,000 saved up, using a 3% yield as indicated above. Is the gym membership worth $18,000? It may very well be, but I think that anyone who is seeking financial independence needs to look at expenses this way because the income your investments provide is how you’re going to be meeting your obligations. $18,000 for me means working for an additional 6-9 months, depending on how much I can save each month. Is a gym membership worth 9 months of your life? Only you can answer that. I’m not necessarily saying the gym membership is a bad idea in this example, but I’m simply imploring you to frame your thoughts correctly so that you can make an educated decision.

Let’s use a different example. Let’s try a car. This will be fun!

So, according to Investopedia the average yearly expense to own and operate a car here in the U.S. is $8,003 per year. You can already see where this is going, right? So, using a 3% yield from your investments you’ll need to have $266,766 invested to meet that expense for the rest of your life. So, is a car worth it? If you ask me if I’d like to work a full 7 1/2 years (saving a full $3,000 a month!) so I can have a car to put around town I’d have to resoundingly say no. Is that car worth $266,766 to you? Again, only you can answer that question.

Maybe you need a car to get to/from work right now and plan on ditching it once you no longer have the obligation of full-time work. But, how much is that car costing you now? How many more months will you have to work to pay for a car that’s getting you to a job you no longer want to go to? Good questions, right? It might be time to answer these questions and perhaps find a way to bike, walk, scooter or use public transportation to get to work. If work is too far away, maybe you need to move.

So, there you have it. That’s one of my secrets to staying so frugal. I don’t just look at expenses in terms of their monthly cost or even their full purchase price. I instead calculate how much capital I need to have invested in conservative dividend growth stocks to meet an obligation and how long I’ll have to work to save said capital. When I start seeing months or years added on to my career I can easily start figuring out which things are really important to me.

Ultimately, it comes down to time and how much of it you want in life. Do you want 8 years of your life or a car? You choose. 

Thanks for reading.

Photo Credit: Free Digital Photos

Comments

  1. says

    Nice post DM!

    I’ve been using this line of thinking to avoid gadgets lately. Sure I can afford an iPad, a new iPhone, and a wireless 4G hotspot but all of that is going to top $200 a month! That’s $2400 a year (at least) and $80,000 of needed investments! Sorry, no thanks.

    Love the blog!

    • says

      The Kechi One,

      Thanks for stopping by! I appreciate the support.

      I hear you on the gadgets. Those are prime examples because they’re really completely unnecessary. Especially so if you’re only upgrading from a perfectly useful, but dated, gadget you already own. That’s really bad!

      I like stuff too. I always look twice when I see a really nice Corvette drive by while I’m on the bus. I say “how cool” when someone is jamming on their new iPhone. But I’m simply not willing to exchange something more valuable (my time) for most of these goods. Stuff is nice. Time is better! It’s all relative to what you value in life.

      I see you’re making great progress towards FI as well. Keep up the great work. Can’t wait to see all of us fellow young bloggers make it there.

      Best wishes!

  2. says

    Ha-ha! Fun and informative post!
    I have tendency to calculate like that too.
    One day one of my co-worker, who whine year long because he’s broke, said he planned to go to holydays to Cuba, with his wife.

    Total of the pain: about $4,500for each one.
    $9,000…for 2 weeks of holidays….

    I tried to explain him that if he put this cash into a 4/5% stock dividend he will have about $450 by year, without counting dividend increase and that it can be tax free in a TFSA account… But he stopped me before that when he heard “stock dividend”.

    • says

      JF Baconnet,

      Thanks for stopping by.

      Yeah, other people usually just don’t get it. And I believe that’s okay as long as what you’re spending your money on truly brings you an improvement to your quality of life that’s commensurate with what you’re spending. It’s just important to make conscious decisions with one’s money.

      Although I would argue that if your co-worker is truly broke, then an expensive holiday to Cuba should probably be canceled until he’s in better financial shape.

      Best wishes!

    • says

      Tell him instead to save the money and

      Retire at age 40, then move from country to country every 6-12 months while living frugally for a few years with his wife and/or younger children. Going from rental apartment to rental apartment throughout the world, then decide somewhere they loved to settle when kids are getting older. Long-Term Travel + Free Time + Family + Internet + Culture + Cooking with local ingredients = one way of Extreme Happiness

  3. says

    Thanks for this post – I am new to seriously thinking about income investing and this is a terrific method. I tend to think of things like gym memberships in terms of today’s dollars instead of how many future dollars I need in order to maintain the expense from investment income.

    I think I’ll try to incorporate this way of thinking into my life. Thanks!

  4. Anonymous says

    Great post! I always think hard about my purchases before I make them as well. Not exactly the same way as you but along similar lines. I am still quite young and I think I could double my money about 4 more times before retirement. So I always think before I spend $100 is it really worth $800 future dollars? ($100 x 2 = $200, $200 x 2 = $400, $400 x 2 = $800).

    • says

      Anonymous,

      Great thought process. I think of money a little differently than quadrupling it, probably because I won’t be accumulating assets as long as some.

      But, yes, thinking in terms of future dollars is what it’s all about. It’s really all about delayed gratification. The whole purpose of investing is to delay gratification today for a greater gratification in the future.

      Best wishes!

  5. Anonymous says

    Love the comparison. I had a similar thought when I passed Dunkin Donuts this morning wondering how nice it would be nice to have a hot bagel on the way in to work since I was early. Then I considered how much little trips like that add up, so I kept driving past and didn’t miss the bagel. It made the homemade corn muffin I brought to work that much tastier.

    Love the information I’ve found on this site. Susan :)

    • says

      Susan,

      Glad you like the blog. Thanks for stopping by!

      Little trips like that do certainly add up over time. I’m certainly not recommending to constantly deprive oneself of life’s little pleasures, but rather be conscious of exactly how much that little pleasure is costing you in the long run.

      Personally, I really enjoy pizza. So, I tend to get pizza at least twice a month and it’s almost never frozen. I’m aware of the costs and I put it in the budget. It’s small, unplanned purchases that can really bite you in the long-term, however. What you may want to do is budget $10/month for Dunkin’ runs and once you hit that number then you’re done. Of course, this $10/mo budget line requires $4,000 in savings. So, you have to figure out if a couple bagels per month is worth $4k.

      Best regards.

  6. Anonymous says

    Always enjoy reading your blog.

    You might be interest in this website http://www.stopworking.ca

    Derek Foster is a Canadian who retired at the age of 34. He has a wife and 4 or 5 children. They recently sold their house and are travelling through North America. I think they are currently in the US. They live off their dividend income and his message is much like your message.

    Keep up the great work. You are on the right path.

    • says

      Anonymous,

      Thanks for the info!

      I actually read about Derek Foster very early on, when I was initially researching the idea of financial independence and investing. His story inspired me, and I’m looking to basically replicate his success.

      He got lucky with some investments, but for the most part did the same thing I’m doing: live well below his means and scale into high quality investments over a long period of time by purchasing assets consistently. I’m happy for him and I hope to reach my destination by 40, which would be a little later than Derek.

      Thanks for stopping by. Keep in touch!

      Best wishes.

    • says

      Well your method is much better then buying lottery tickets every day!

      Saving money daily + investing it monthly = Cash + growing dividend Cash, + Capital Gains, if ever sold high (the chance at Capital Gains >>> the chance at winning the Lottery in a Lifetime).

      P.S. minus taxes and inflation which would put lottery buyers into the extra negative.

      I might have to do the Calculus Proof, and write a book on this formula with future freetime ;-)

  7. says

    Great post. Of course this is just money talking. One must also see what qualitative advantage there is to buying things that enhance one’s life.

    Also, in doing so, wisely buying can come in between those lines of thinking. Like knowing that a car can cost much if bought new. You can have a used car for some affordable money and using it wisely can, in the big picture, be a great move. Say you decide to live just a little bit further from your work in a less expensive place for example. You might be paying higher transportation fees and saving on rent.

    I am not trying to say it is better to have a car, just that one have to think outside the box for ways to enhance his/her life at an affordable price…. and be prepare to invest at the same time.
    For sure, the quicker one reach retirement/freedom the better, but at what price? It is very much subjective, we all most know what we want and what makes us happy.

    I really like my independence, I enjoy seeing my dividend coming in and I appreciate my car… even if it is parked most of the time ;)

    • says

      grox01,

      Good stuff. I agree with what you’re saying.

      The point of the post is not to degrade purchases, or things in general. Rather, simply be conscious of how much things really cost, and decide if it’s worth it.

      A car can certainly be had for much less than the U.S. average. That’s simply a middle point. But, if you get a decent car for $5k and keep it for 5 years and spend $75/mo on insurance and $150/mo on gas and $75/mo on maintenance and repairs then you’re looking at $4,600 per year in total ownership costs. Much less than the example used above, but that still requires over $150,000 in invested capital at 3%. Again, this may be totally worth it to you. For me, that’s a lot of money to have a big hunk of metal carrying me around town.

      It usually comes to quality of life vs. expenses. I try to always make sure I’m maximizing my quality of life while at the same time minimizing my expenses. I’ve found that I’m actually happier now than when I had a car and a fancy apartment and ate out all the time because I always knew deep down that what I was doing before wasn’t really sustainable. The feeling of knowing that you’re one a path to something amazing is a great feeling indeed, and quickly makes up for any material reduction.

      Best wishes!

    • says

      DM,

      I totally agree with you, the feeling of sustainability is good. To be able to get out of the rat race is fantastic.

      We can almost see it as a game. We play the game of being in control of where we decide our money go, what we do with it and why is based on our strategy and purpose. Knowing we have a strategy and seeing the result is rewarding.

      As for my car, the insurance is about $200 a year maybe less. It is assured only one side since it has less than $4000 value with minimum everything else covered. I drive a 2003 Corolla, fine car to get where I want, I rarely change things on it. I would say max $400 a year for maintenance. Low on fuel too as it cost me less than $50 a month, when I don’t go on trips… I bought it in 2005 and my cost per year is diminishing every year, say max $1000/year. You get $2200/year total, still I would be looking at $74,000 base on your assumptions.

      But wait a minute, I don’t have to pay for bus or metro which is around $100 a month and no expensive taxi… put in another 50 if you like or not! Just on the bus/metro we get $1200 or $40,000.
      So my real cost for owning my car compared to bus/metro without taxi is $34,000! Now that is affordable and convenient. You would do it in less than a year’s worth of saving.

      I have enjoyed this playing with the numbers. And the basis of your thinking is great for making sure we want the things we buy.
      I guess on strategy could very much be get out of the rat race first and then add to your quality of life second.

      All the best to you too :)

    • says

      If you carpooled on every trip, you could save more money.

      Or if you installed an AC generator motor with Solar panels covering the used car like paint and only drove on sunny days around town, then you would only have to pay insurance, licenses(Taxes), and tire/axial maintenance. And you might be given a Tax rebate of some kind for just purchasing solar panels and saving the future’s Atmosphere.

    • says

      Anonymous,

      $10/mo isn’t bad. Of course, you can jog, and do some pretty great all-body exercises at home for free. Of course, I’ve personally found working out at home difficult due to lack of motivation and so the gym membership is usually worth the cost.

      Take care!

  8. says

    Nice post, DM. I sometimes find myself thinking in terms of how many shares I could buy with the money I’m saving. Dining out? Maybe a share of INTC. That DVD set? A share of KMI. A concert ticket? A share of NSC. And so on… it’s another way of putting money in a different perspective.

    Relating to an earlier comment, a younger relative of mine is currently in the Caribbean for a week-long vacation, despite telling me a while ago that she would focus on aggressively paying down her debt (particularly student loans and car payments). Sigh.

    • says

      DGM,

      Great point there. I do that sometimes as well! I don’t know if it’s necessarily a good thing or not, but I often think when I’m dining out and I look at the final bill…I often think “man that could have purchased a share or two of something”. That’s funny!

      Yeah, on your second that’s a shame. I suppose the only way people will learn financial responsibility is if they really want it.

      Best regards.

  9. says

    That’s a very interesting way of looking at spending. I never thought that a gym membership could cost upwards of $18,000 a year! Actually, the opportunity cost would be even greater since that $18,000 wouldn’t be allowed to grow and compound if you spent it.

    I’m already doing my best to cut costs and reduce expenses, but now I’m even more motivated to save. Compounding is powerful, it just takes a lot of time and capital to get the momentum going. I sure hope the journey to reaching 200k comes a lot faster than 100k.

    Cheers!

    • says

      FI Fighter,

      I hope $200k comes quicker than $100k as well. I expect to hit the $100k mark some time early in 2013. That will mean it took me about 3 years to hit it. Hopefully I can cross the next $100k in 2.5 years. We’ll see!

      The gym membership doesn’t actually cost $18,000 a year. Rather, the gym membership requires $18,000 invested so that you can receive the proper amount of passive income to pay that monthly obligation. I hope that cleared it up for you.

      Best wishes!

  10. says

    Why do nuclear or power plants / industrial factories have to be so far away from residential zones? (rhetorical question)

    Modern Cities are built on infrastructures of roads/trains and for Max Work-Taxed-Spend-Taxed Consumerism.

    Sigh, to many chains. 401k frustrate me too and i only put up to the max matched for free money, because they are intended to chain up your money, fee it, control your money, and place all the risk on your money not theirs, while age restricting it and placing restrictions on withdrawls for massive spending only like a house.

    To me 401k/IRA’s are ANTI Early Retirement Extreme/ FI.

    I rather retire at 40 with a taxed investment account, then not to be able to get passive income on a sheltered account.

  11. says

    A $100 (or used) bike every 5 years is $800 in a post work lifetime.

    A $1000(or free) horse + $10k for land initially, every 20 years with $50/mth in feed (or grow your own free) and $10/mth in property taxes, is cheaper then a car for life, plus possible breeding investments or renting of horsepower.

    • says

      FYC,

      Great point there. A bicycle is one of the most efficient ways go get around, as not only is it extremely cheap but also very healthy. I know MMM is big on bikes, but I personally preferred my scooter. It allowed me to show up to work sweat-free.

      Best wishes!

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