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Episode 3078:
Most of us aiming for financial independence don’t live in luxury, but what truly counts as a luxury? Darrow Kirkpatrick challenges the idea that luxuries are inherently bad, arguing instead that they should be evaluated based on their function, personal value, and overall cost. By asking whether an expense is optional, meaningful, and affordable, we can make smarter financial choices, prioritizing what genuinely enriches our lives without falling into the trap of unnecessary spending.
Read along with the original article(s) here: https://www.caniretireyet.com/luxury-or-essential/
Quotes to ponder:
"A luxury is 'something inessential, but conducive to pleasure and comfort.'"
"The problem is when you develop habits to the point that expensive luxuries become necessities, or you want them in all areas of your life."
"When you spend money, you choose consumption today over the lifetime of interest income you’d achieve from investing it instead."
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[00:00:30] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.
[00:00:55] So press play on good sleep tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app, and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily, Luxury or Essential, by Dara Kirkpatrick of CanIRetireYet.com.
[00:01:19] It's safe to say that most of us in line to become financially independent or retire early, don't lead lives of luxury. For example, I shave with bar soap, buy socks at Walmart, don't pay for cable, and still don't own a smartphone. I'm just a lifelong cheapskate who's been privileged to splurge in a few areas. Frugality is a necessary baseline for most who build wealth.
[00:01:47] But does this mean that luxuries are bad? And what exactly is a luxury anyway? Could it be different for different people? The dictionary tells us that a luxury is something inessential, but conducive to pleasure and comfort. But that definition leaves quite a bit of room for interpretation. To be essential is to be close to the essence of something, inherent, almost a part of it. What is truly essential to human life?
[00:02:18] Water, food, clothing, shelter, companionship? It's a short list. And at least in the developed world, easily or freely obtained by most of us. Does that mean that everything else, from bicycles to BMWs, from ginger spice to ice cream, from watches to iPhones, is a luxury? Perhaps. When it comes to evaluating an expense for the kind of frugal living that leads to financial independence,
[00:02:47] I think it's more useful to focus on the following three factors, rather than on whether something is a luxury or not by someone else's standards. Number one, what are its features in addition to its core function? Number two, what is its value to you in relation to its cost? And number three, what is its overall cost in relation to your living expenses? Take cars for example.
[00:03:17] The core function of a vehicle is to transport you and some of your stuff from one place to another. Onboard navigation systems, iPod integration, rear view cameras, and 400 horsepower with paddle shifters really are supplementary to that goal. However, corporate marketing machines have been pretty effective at creating artificial functions for your vehicle,
[00:03:43] such as enhancing your self-image or rewarding you for having arrived. When we bought our Prius in 2007, we wound up with the Touring model because it was already on the lot, in the color we wanted, and the dealer was willing to negotiate aggressively on price. What made it a Touring model? Alloy wheels with slightly larger and harder to find and more expensive tires.
[00:04:10] And a slightly larger rear spoiler. Utter foolishness since discontinued by Toyota. I'm glad we didn't pay more for these luxuries, which turned out to be slight liabilities in this case. But we do love our Prius, primarily because it has been cheap, functional, trouble-free transportation. Take our 2006 camper van. If purchased new, we got ours used, of course.
[00:04:39] It would cost as much as a BMW 7 Series sedan. Is our camper van a luxury vehicle then? Maybe. Maybe not. It's a lot slower, noisier, and harder to drive than a BMW sedan. We're somewhat less comfortable in it than we are in our full-size house or even a hotel room. On the other hand, it's a lot more comfortable than camping in a tent or a pop-up trailer.
[00:05:05] And by letting us cut lodging costs and prepare our own food on the road, it enables a mobile lifestyle and long, inexpensive vacations that have been steadily earning back the initial cost. Luxuries are fun. They make life more pleasurable and comfortable. In a world of infinite resources, time and money, most of us would add all the luxuries we could on top of life's necessities.
[00:05:32] But alas, we only have so much money and so much time to learn, maintain, and play with our stuff. So for each purchase, we need to decide, is this truly valuable to me? And how do you know that? Ask yourself a few questions. How many hours do I have to work to afford this? How many hours will I use it? Will I still benefit from it a year from now? Is there a better way to spend my money?
[00:06:02] The primary luxury in my life for many years, until it was stolen last summer, was my mountain bike. I rode a near competition level model from a small, trendy U.S. bike manufacturer, outfitted with top-of-the-line components. Though I got a deal on it from a friend in the business. It retailed for what would be a generous month's pay for many. Outrageous to spend that much on a bicycle, right? Yet I never once regretted this luxury in my life.
[00:06:32] I could easily afford it, in part because we own so few other luxuries. And it gave me riding confidence on countless exciting backcountry adventures with my teenage son. When it was stolen, I was content enough to replace it with a recreational level bike at less than one-third the cost, because I no longer valued the luxury in that area of my life. That brings us to a final question for evaluating luxuries in your life.
[00:07:01] Can you afford it? The issue with luxuries isn't that they are inherently evil or inappropriate. The problem is when you develop habits to the point that expensive luxuries become necessities, or you want them in all areas of your life. Take the well-worn latte factor. It's hard to find a personal finance website without either an article or a calculator
[00:07:27] showing you how much you could save towards retirement if you swore off expensive coffee drinks. Well, I have a confession. We like high-end coffee shops and bakeries. Sometimes, usually on vacation, we go to them. But we've never lived near one, so it's never been part of our daily routine. A few times a quarter, when we're traveling away from home, it's a fun splurge. And it's never enough money to be more than a blip on our monthly spending.
[00:07:57] We could probably even afford a latte a day if we wanted. But then that would start to crowd out other potential luxuries. And coffee just isn't that important to us. So, when thinking about the expenses in your life, ask yourself these three questions. Number one, is this optional? If so, then it is, to some extent, a luxury. And you should give it a little more thought before spending.
[00:08:23] Number two, is this truly important to me? If it's something you value over almost anything else, then you should prioritize that expense. As long as you can answer this third question. Number three, can I afford it? Is it less than a few percent of your monthly budget? Or does it enable long-term quantifiable savings or quality of life? If so, go for it. Otherwise, don't go there.
[00:08:52] When you spend money, you choose consumption today over the lifetime of interest income you'd achieve from investing it instead. The total amount of money you spend on consumption, plus the foregone interest earnings, adds up to the real cost of spending. This number is much higher than you might expect. That's because of compound interest.
[00:09:19] You just listened to the post titled, Luxury or Essential? by Dara Kirkpatrick of CanIRetireYet.com I think this question of luxury versus essential is highly subjective. When I look around me, I feel like I'm surrounded by luxury. I have a great house with central air that's larger than any apartment I've ever lived in.
[00:09:43] I have plenty of food in the fridge and running water and a car that gets me from point A to point B. But I suspect that most people would never describe my lifestyle as luxurious. That house that I love? It's only 1,100 square feet with no garage in a neighborhood that's up and coming but still a bit rough around the edges. That food in the fridge? It's certainly not caviar. And I'm not splurging on fancy filters for that running water either.
[00:10:14] I'm perfectly fine to drink tap water. That car that I love? It's definitely not a Tesla. I'm cruising around in a 2010 Mazda 3 that I bought for $6,000 cash. I think it feels luxurious to me because I've learned to foster a deep appreciation for these things. And I've developed the capacity to enjoy simplicity. As Socrates said, quote,
[00:10:40] The secret of happiness you see is not found in seeking more, but in developing the capacity to enjoy less. End quote. Enjoying less is an incredible skill set that our consumerist culture will never talk about. But it will make you rich as hell. And not just rich monetarily, but rich in time and energy as well. And that should do it for today. Have a happy rest of your day.
[00:11:09] And I'll see you on the Thursday show tomorrow, where optimal life awaits. Over the next few weeks. Thank you.