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When Can I Loosen the Purse Strings on Expensive Items?

By Jimmy Turner, MD
The Physician Philosopher

When I first saw this week’s Saturday Selection, which was originally published at The White Coat Investor, I laughed out loud.  Determining if it is okay to loosen the purse strings is something that my wife and I are currently dealing with ourselves.  In fact, we are thinking about joining the “crazy club” by purchasing a Peloton.

Now in my third year as an attending physician, our savings have become automatic.  We save a six figure number annually that accounts for more than 20% of our income towards retirement; we invest a substantial amount of money into our three kid’s 529 each month; and we give 10% of our pre-tax income to charity.

Despite all of this, I have struggled at times to loosen the purse strings after building some pretty strong frugality muscles the last four years.  When is it okay to start spending on more expensive luxury items? That’s exactly what this post aims to answer.  Enjoy this classic from The White Coat Investor. 

Q. When is it OK to Spend on Luxury Items and Expensive Hobbies?

Lately my wife and I have been looking at future budgets and the possibilities of getting a plane later (I know your post about boats/planes).  We wanted to know if you thought this was reasonable.

After running the calculations we reasoned that we’d have less money in retirement, but figured what’s the real benefit of retiring with $10 Million instead of $5 Million?We will either live in a small town (50K population) in Oklahoma or Texas.  On our $400K gross income, we’ll be able to put about $11k per month in after tax dollars into investments.  We’re considering saving only $7-8K per month and getting a boat and/or plane. At what point do you reach a saturation on investing for retirement?

A.

What a difference between your lifestyle and that of the physician last week considering the purchase of a starter home costing $1.25 Million!  You guys can probably buy a mansion on a couple of acres for $300,000 in your small town.  Your question is a good one (and one that I struggle with at times too.)  At what point do you say enough is enough and go spend some money?

4 Considerations Before Loosening the Purse Strings

#1 Save 20% for Retirement Savings

My rule of thumb for retirement saving is that you should save 20% of your gross income toward retirement.  With your $400K income, that’s $80K, or less than $7K per month.  Once you are saving that much, I don’t think you should have a lick of guilt about spending or giving away every dollar you make above and beyond that.

#2 Budget Conservatively

Airplanes and boats are exceedingly poor “investments.”  They say a boat is a hole in the water into which you throw money, and after owning a boat for a couple of years, I can testify that’s correct.  Ownership of these expensive toys is usually far more expensive than you at first realize, so budget very conservatively for these items. Planes in particular have high fixed expenses including storage costs and annual inspections.

#3 Fund Other Non-Retirement Financial Goals First

Young physicians (and I include myself 6+ years out of residency) often have other (non-retirement) financial needs and goals they need to save for.  We often have inadequate emergency funds (especially given our new spending habits), some high-interest debt, and little to no college savings for our kids.  These things are all above and beyond the “20% retirement savings rule.”  So you should ensure your plan covers these items as well before committing to an expensive hobby.

#4 Income

Last, keep in mind that your income isn’t static.  While we may hope our real, after-inflation, income will rise throughout our career, the trends in physician reimbursement are not reassuring in this regard.  Physicians in many specialties are working harder and making less than they were 10 years ago, and between Obamacare, the growth in ACOs, bundling of payments, and the very real concerns about the cost of Medicaid/Medicare, I suspect the trend may continue or even accelerate.  There’s something to be said for “making hay while the sun shines.”  Saving $50-100K a year now for retirement may be far easier than it will be ten years from now.  It isn’t like you couldn’t sell the plane in a few years if your income drops, but you ought to at least consider the possibility of a decreasing income in your plans.

What say you readers?  How do you decide when enough is enough? Comment below!

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