One of my readers on The Spending / Savings Balance post asked why I should feel bad spending money on remodeling my house when it should be considered an investment, so long as I don’t go over board.
The truth is that when I was cutting multi-thousand dollar checks every week, I was telling myself that all this spending was indeed an investment to make myself feel better about going outside my spending comfort zone.
But now that I’ve taken a hiatus from spending for a couple months, given it takes time to get my drawings approved by the San Francisco Planning Department, I’ve come to realize how dangerous it is to justify every single dollar spent as an investment. An investment has an implicit assumption that it may provide a return some time in the future. The reality is that there are no guarantees, except for the guarantee you no longer have the money you spent!
My hope is that by spending around $100,000 on my home, I’ll provide at least $200,000 in value at some point in the near future. Given I was so focused on this type of “investment return,” I cut checks with ease for the first $60,000. Now that I’ve taken a break and only have $40,000 left in my budget to spend, I’m going to be as scrupulous and strict as possible to make sure the contractors do an amazing job within budget. If I didn’t take a break from remodeling, I’m pretty sure I’d go over my budget by at least $20,000.
SPENDING AS AN INVESTMENT EXAMPLES
We’ve just talked about how homeowners can easily blow through their budget because they have this default assumption that whatever they spend in their home will provide more than a 100% return. This is false thinking. Instead, the homeowner should think about how much the final product can recoup. For example, kitchens and bathrooms tend to recoup 80%-90% of the money spent. The other 10%-20% should be considered the “joy value” created by your usage. Only in very expensive areas of the world does remodeling provide greater than a 100% return on spend given the cost per square foot to purchase and people’s incomes, which makes the opportunity cost to do the work themselves more expensive.
Here are some other common examples where people might trick themselves in spending more than they should:
Overspending On Material Things
One woman I know told me she had to buy the latest $2,900 Louis Vuitton purse because it was an investment in her appearance. She wanted to look like a million bucks during her interviews. I bluntly told her that if she looked like she had more money than the interviewer, she wouldn’t get the job unless it was some unscrupulous guy who showed tremendous bias towards attractive women. She ended up interviewing with a woman whom she thought was mean and didn’t get the job. It turns out my friend has around 15 luxury bags worth between $1,000 – $5,000 each. She’s not doing great on the financial front.
A buddy of mine wanted to pay $2,000 for a Giorgio Armani suit. He also said it was an investment. But the truth is that he would be much better served spending the $2,000 on healthier foods and a trainer because he was obese. 10 years ago he was fit, but something happened over time. It didn’t matter whether he wore Armani or Macy’s store brand, he still looked out of shape. His “investments” in nice clothing led him to mask up his real problem, which was his deteriorating health. We got him into our health group, and he’s in much better shape now.
I wrote the Net Worth Rule For Car Buying post to justify my desire at the time to buy a $100,000 Porsche 911 CS. The post gives those who’ve accumulated a decent amount of assets, but who are no longer making a high income, a green light to buy something nice. I wasn’t making $1,000,000 a year to follow my own 1/10th rule for car buying, which has since become one of the most popular car buying rules on the web.
I think it would be sweet as hell to buy the new Lamborghini Huracan for $237,000. It’s $200,000 cheaper than the Lamborghini Aventador, and it would be a great online media investment because of all the articles and videos I could produce driving around in such a beast. I could do video posts to see if driving a nice car really does attract more people. I could write about whether police officers will try to pull me over even when I drive the speed limit. I could create a Lambo website that sells after market parts! Oh yes!
Education will alleviate poverty and set us all free, up to a point. I am constantly amazed by people who get into some of the most elite private universities in the world because there’s no way I could ever get in. My cousin, for example, has straight A’s, plays varsity soccer, and recently got a “Likely Letter” to Princeton. My only fear is whether or not Princeton will provide her parents enough financial aid so that they can continue leading normal lives as research scientists. My cousin certainly won’t be forking over the $60,000 all in cost a year.
There is tremendous brand value going to an elite private University. Society has convinced us that we should pay whatever it costs to go to a university like Princeton. But that’s an old school mentality. We must recognize that thanks to the Internet, education is quickly becoming free. Not only do you have the private universities themselves giving away their course work online, you’ve got Khan Academy, MOOCs, and blogs written by experienced people who provide valuable insights and knowledge. I firmly believe anybody can get a world class education for free nowadays thanks to the Internet.
If I meet someone around my age who went to Harvard, I’ll be impressed by his or her ability to get in as a high schooler. But what I want to know is what they’ve done with their degree since then. If you are considering getting an MBA or suffering through a PhD, don’t fool yourself into thinking the prestige is worth all that money and time you’ll spend. Focus on the practical applications of your degree(s). Have a good idea of what you want to do post graduation, how much such occupations pay, and the employment trend.
Investing in education is fantastic up to a point. Once you go beyond that point, you’ll be laden with debt and voting on big government to give you a freebie at the expense of tax payers who didn’t go crazy with education.
WE CAN JUSTIFY SPENDING MONEY ON ANYTHING
The beauty of being human is our ability to justify anything. It’s those who justify their spending too often who get themselves in trouble. Always mull things over for at least a day before buying some material item you don’t need. When it comes to bigger ticket items such as a car, going back to school, or buying a house, get as many different perspectives as possible before ultimately deciding what’s right for you.
Before the end of the year, I challenge you to produce something that will bring you incrementally more income if you’re planning on spending incrementally more money than normal. Maybe you’ll go the extra mile at work to set yourself up for a raise and a promotion. Maybe you’ll start something you’ve been mulling over for years, but have been too lazy to launch. I promise you that producing is more rewarding than constantly consuming.
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Updated for 2020 and beyond.