As a general financial principle, it is important to be able to postpone gratification. You have to be able to delay getting the stuff you want today, so you can save for tomorrow.
But let’s consider a scenario.
Jack is a very financially responsible person. He has six months of savings in the bank for any emergencies, and he is dutifully investing 20% of his income into his Roth IRA and 401(k). He is debt free except for his mortgage.
But Jack doesn’t earn a ton of money, so after investing 20% of his income and paying his mortgage, utilities and such, his expendable income is only $500 per month. But Jack has been a very good boy for a very long time, so he has decided to treat himself with a media room. Between the 85 inch television, surround sound system, seats, movie posters, and the popcorn machine, the project will cost $10,000. Jack should probably just accept the fact that he can’t really afford such a fancy media room, but he has promised himself that he will eschew any more extravagant purchases. No vacations and no new cars for Jack.
Let’s figure out a way to get Jack his new media room.
Should Jack take $10,000 out of his emergency fund? Absolutely not! That is not the purpose for his emergency fund. Should Jack save the money for his media room? He could, but since he only has $500 of expendable income, that is going to take him 20 months.
Now you might say that if Jack has to save for almost two years to equip a media room, he probably should not be spending his money that way. But keep in mind, Jack’s been really financially responsible. The reason he is so limited in his expendable income is because he is investing 20% for his retirement. And he has no debts, beyond his mortgage. You could argue that he should take that $500 per month and dump it into his mortgage instead of a media room, but there is another concept at play here.
If you ever watched the show Everybody Loves Raymond, you may recall that Raymond’s mother kept her living room couch wrapped in plastic. This made the couch ugly and uncomfortable. But in her mind, the couch had to be preserved. She completely failed to realize that she was living with an ugly couch today in order not to have an ugly couch in the future.
Life is a journey, not a destination.
When we put money away for retirement, we are necessarily depriving ourselves of that money today so that we can have it in the future. That’s necessary and appropriate, but if you live a Spartan lifestyle for, say, 20 years so you can sock away all your money for retirement, then you are to some degree living on the plastic covered couch today, presumably so you don’t have to live on plastic covered couch in the future. How does that make sense?
But there is one flaw in my analogy. It fails to take into account the power of compounding. The dollar you save today doesn’t represent a dollar in your future; it might represent ten dollars. Thus, a more apt comparison might be, would you live on the plastic wrapped couch for a year, if meant extending its life by five years? And the answer is, moderation in everything. One year is a long time to sit on plastic, so maybe six months would be better, even at the loss of some future benefit.
There simply is no set answer. You must find the balance between preparing for the future while enjoying the present. Jack could put that extra $500 toward his mortgage, but that means sacrificing the media room today, for some unspecified better life in the future that he may never live to see. As long as you are being financially responsible in all other regards, then maybe it’s okay to steal a little bit of that future comfort to enjoy something today. If one were to resort to a cliche, one might say that all work and no play makes Jack a dull boy. We don’t know Jack. He has to make the decision.
Instant gratification as a financially savvy choice.
But I’ll take a step beyond that, and show you why instant gratification can actually be the more savvy financial choice.
It is essential to always consider the amortized cost of a purchase. Home improvements are a great example. On average, Americans live in a home for nine years before moving. So you move into a new home, and the flooring is not so great. You get some estimates, and the new flooring you want will cost $30,000. If you replace the flooring the moment you buy the house, and move about nine years later, then you have in essence paid $3,333 per year for that flooring. And you got to enjoy it for a full nine years.
If, instead, you suffered was that horrible flooring for five years, and finally spent the $30,000 because you couldn’t stand your spouse complaining about it any longer, then you have paid $7,500 per year for the flooring, since you only got to enjoy it for four years. You could conceivably recoup some of that when you sell the home, but that has not been my experience. When it comes to flooring, tastes can be very different.
So let’s get back to Jack and his new media room. Jack could wait twenty months to buy his media room, but he only has so many years in this house and on this earth. Who knows what the future will hold? His next home may not be suited for a media room. If he waits, he may never realize his dream. I can see him on his deathbed, choking out the final words, “I never got my media room.”
Even if Jack never moves, he is still better off buying it now rather than later since he will get to enjoy it just that much longer. Especially in the case of technology, you’ll forever be chasing the latest 4k, 8k, 12k television if you don’t just pull the trigger and start enjoying.
But are we getting ahead of ourselves? We’ve already determined that Jack should not take money out of his emergency fund, so how is he going to pay for it?
This is where Jack needs to be brave, while sticking to his financially responsible ways. Jack is debt free, and should fight to stay that way. But we should never be so entrenched in a concept that we make poor choices. If Jack gets a zero percent credit card, he can put the purchases on the card, and then pay it back with the same $500 per month he would have been saving. Since both methods achieve the exact same result, the financially savvy thing to do is to gain from the benefit of amortization by making the purchase now. Indeed, putting the purchases on the card will add 20 months of on-time payments to Jack’s credit history, potentially giving him a higher credit score and lower mortgage interest rate should he ever decide to move.
What are your thoughts? Do you agree with me that Jack should allow himself this treat, or do you think a $10,000 splurge can never be justified, especially if it involves putting the purchase on a credit card? Let me know in the comments.