Once your housing expense is under control, the next thing to tame is your consumption habits. The most common waste of money today is buying an automobile. New cars are simply too expensive for the median household income. But because car manufacturers have created ways for consumers to stretch with financing and leasing deals, consumers succumb to marketing persuasion and buy cars they cannot comfortably afford.
If consumers follow my 1/10th rule for car buying, almost all of one’s financial problems, as it pertains to a car, will go away. If you spend only 10% of your gross income on the current value of a car, you won’t sweat paying insurance, paying tickets, or paying for maintenance or damages. At the same time, if you want a $30,000 car, find a way to make $300,000.
If you want a luxury automobile that costs a whopping $100,000, then you best make more than $1 million gross a year!
Now that we have a viable solution for automobile buying, the next bad consumption habit to slay is everything else you don’t need i.e. wants. From buying $3,000 Louis Vuitton handbags to spending $9,000 on a Panerai watch, there are a lot of wants that will prevent us from achieving financial freedom sooner, rather than later.
Therefore, to solve this problem of mindless consumption, I’ve come up with The 10X Investment Consumption Rule.
The 10X Investment Consumption Rule
Before I explain to you the rule, let me share a comment from a reader in my post, Here’s When You Know You’re Not Yet Rich Yet. The post talks about wasting 2.5 hours of my life because I was unwilling to spend an extra $100 to fix my cracked iPhone due to sunk cost fallacy. Nate’s comment inspired me to come up with this consumption solution.
Apple continues to be really, really good at social-engineering sheeple to buy their products and services. It has perfected marketing and social engineering. Its users are willing to buy overpriced phones that require overpriced dongles and overpriced support. And even when the users get kicked in the gut, they’ll continue buying Apple over and over again. It’s irrational; it’s also great social engineering that you fell for.
So yes, I am a sheeple for using Apple products. I fell for their marketing and social engineering because I realize their products are so much more expensive than generic PC products. But because their iPhone was so revolutionary when I first got one in 2008 and because Apple built an ecosystem of apps that made their software and hardware easy to use and integrate between a laptop and a mobile phone, I stuck with it.
Unfortunately over this time period, their products seem to be worsening in quality, and their customer support has declined as well. Going to an Apple Store is almost like going to the DMV, a nightmare place.
But after the comment, I realized one of the reasons why I keep buying Apple products is because I’ve owned Apple stock since 2008 and I love supporting companies I invest in.
Invest In Companies You Use
The first iPhone came out on June 29, 2007 and I was a skeptic. I had been a heavy Blackberry user since 1999 and couldn’t fathom a buttonless device being good enough for work correspondence. Some of the e-mails I had to write on my Blackberry were extremely lengthy due to the amount of research analysis I had to provide to my clients.
But after a year passed, I decided to give it a shot. And after a couple months of giving it a shot, I bought $10,000 worth of Apple stock. Over the years I’ve ended up buying about $100,000 worth of Apple stock that has since provided a healthy return as the stock is near an all-time high. During this time period, my overall net worth increased as well.
I can basically frame my family’s Apple product consumption of iPhones, Macbooks, and iPads as free since 2009 + a profit thanks to my returns in Apple stock.
The 10X Investment Consumption Rule simply states that before you buy any product or service you don’t need, you must first make an investment return equal to at least 10X the cost of such product or service.
Consumption Example #1: Overpriced Mobile Phone
You want to own the absurdly priced iPhone X for $1,000. To do so, you must first make a $10,000 return on Apple stock. You could also make an investment in Apple’s downstream component suppliers as an alternative.
If you follow my rule, you’ll need to review your existing liquidity in order to determine how much you can afford to invest. You’ll have to do a deep dive net worth allocation overview to see where you are currently exposed. You might even run a cash flow analysis to see how long you need to save before you will come up with the investment capital.
If you can’t afford to invest, how can you afford to buy a $1,000 phone? If you’ve only got $10,000 to invest, you realize that you’ll need to return 100% to be able to afford a $1,000 phone. Such a time delay will make you think thrice before buying something you don’t need.
But if you have $100,000 to invest, it might be easier for you to make a 10% return to afford a $1,000 phone. And since you have $100,000 to invest in one stock, that must mean you have much more behind, which means you absolutely can afford to splurge.
The goal is to transform from a consumer mindset to an investor mindset.
Consumption Example #2: Basketball Sneakers For Show
You want to own the latest colorways of the Jordan 3, Jordan 4, Jordan 5, and Jordan 6 shoes. The total cost for this box set is $900. Before you waste money on basketball shoes you’ll use to just walk around in, you’ve got to return at least $9,000 in Nike stock.
I swear to goodness, every time I go to a Footlocker or Nike Store when a new Air Jordan retro drops, there are lines out the door filled with teenagers and 20-somethings, the poorest demographic in our country.
By spending hours researching the company that’s taking all their money, Air Jordan consumers will understand more about how a business is run. Sometimes, they’ll discover some products have a 90% gross profit margin, which makes them stop consuming for not wanting to feel stupid. Other times, they might be inspired to start their own business to capture such profit margin.
Consumption Example #3: European Vacation
Instead of driving an hour to the beach for just $10 of gas, you just have to fly to Santorini for $1,000. The trip will be fabulous for your Instagram and Facebook profile.
The 10X Investment Consumption rule means that you’ll have to make $10,000 in an airline stock like United Airlines (UAL). That’s no easy task, especially with oil prices moving higher, but that’s the whole point.
By the time you finish researching and investing in your favorite airline stock, you’ll understand how to measure available seat miles (ASM), revenue per available seat mile (RASM), cost per available seat mile (CASM), break-even load factor, and earnings sensitivity to a dollar in oil price change.
Or maybe you might want to do research on TripAdvisor (TRIP) to figure out when the slow season is to find the best Santorini deals. After all, you’ll also have to spend money on lodging, food, and entertainment.
Related: The Boot: A System To Enable You To Spend Money More Freely
Adopt The Investor Mindset If You Want To Spend
If you can’t get excited about investing in a particular stock after doing your research, the simple solution is to either buy an index fund, a sector index fund, or don’t buy that particular good at all. It’s only logical that if you don’t like the fundamentals of the company, then you shouldn’t be supporting the product.
Having a savings + investing mindset will always ensure that you make enough money before spending. If you can do this, you will never go broke. You will learn patience. You will better appreciate the value of a dollar.
Instead of living paycheck to paycheck, you’ll likely grow rich beyond your wildest dreams.
Build More Wealth Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile. Real estate provides utility and generates income. If you like to spend money, not only should you follow my 10X investment consumption rule, you should also develop passive real estate income as well.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Stay On Top Of Your Money
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.
Wow, what a quick hard hitting piece Sam! Makes me want to hang onto my 6s longer:)
Ten Bucks a Week says
Excellent, so before I buy your book, I must make $850 by investing in your site. How do I go about that?
Financial Samurai says
Ah, You’re mistaken. First of all, the book is only $75 with the promotion code on the page. Second of all, the book is a necessity, not a want.
When you actually have the potential to make back multiple times the investment, that is an investment! And from many people I’ve talked to, they have done very well.
Robert T Griesmeyer says
Awesome! I recently started adopting your (invest 50% of your income). I wouldn’t have been able to do it without moving out of my “convenient” Mission apartment in SF to Oakland. My rent is half of what it was before and now I can save 50% of my income. I’m on track to buy a house in one year.
Steve (NWOutlier) says
I really like this idea; I’ve had an idea of my own, but yours is better! My idea was if I wanted that ipad or iphone (or anything), I would have to save 5x to 10x the cost into my investments, before the time of purchase. The reason for the spread is; 10x is for electronics cause they become obsolete so quickly and 5x is for any other type of purchase, let’s say furniture.
Your idea has the investment and the growth built in before you buy the toy or item… I mean it’s tough to do, but wow I think I’m going to try it!…
I might have read this wrong so apologies if I misunderstood, but what is the point of tying your investment to the product you want to purchase? That makes no sense to me. I understand and agree with your investing rule, but why are you not recommending using ANY investment income? If I want an iphone for example, I need 10X the return from a particular investment earmarked for a phone, but the investment has to be with the company that made the phone? Seems way less than optimal for returns. Pick the best investment opportunity and tie that to the purchase makes more sense?
Sam, good article. Would this also means following couple of 3 items; please help figure these:
A. If you now hold $300K worth of APPLE stock gains, which means, you now have to right to buy $30000 worth of Apple goods ? And, if you only spent $10K out of it thus far, could you repurpose remainder of the $20K AAPL spendable gains on some other items (or restrict to only Tech items) ? Or dump the remainder $20K spendable gains in 529 plan or something ?
B. Alternately, if you made say $100K in NFLX stock, would it mean, now you have $10K allowed to spend on NetFlix or its gear. How long it would take at $9.99 plan to catch-up to $10K spendable gains ?
C. You may feel Tesla as a car may be a good one (or not), but you may never want to own TSLA stock over the last 4-5 years. How you reconcile that ? (I know, you have another Car specific limit, assuming the purchase is within those limits/guidelines)
Financial Samurai says
A. I wouldn’t spend more on Apple products just because I’ve made more on Apple stock. The 10X IC rule is a MINIMUM. I would personally keep the money invested and let it compound.
B. Given Netflix costs $10/month, an awesome 83 years to spend your profits down. Again, keep the money invested. Your Netflix expenditure is good to go.
C. This one is easy. For all automobile purchases, follow my 1/10th rule for car buying.
Mr. Rational Buck says
Sam, it’s a great rule. I found your 1/10th car buying rule right around the time I borrowed $25,000 for a car…
You’re correct – buying above your means causes unnecessary stress. Some days I look back and wish I had bought a $2,500 car, while other days I am simply grateful that I have a safe, reliable means of transportation. It was a decision that really made me look at what I was doing with my finances and helped me see that there was a different path than the one I was on.
Your articles helped me see that, and I am very grateful for that!
Financial Samurai says
Glad to hear it! Having car stress is so unnecessary. The thrill of a nice new car or nice used car fades after 6-12 months.
I enjoyed reading your initial post on the 1/10 rule for purchasing an automobile. I have resisted buying a new car, even though I make 6 figures, due to your advice. My 2009 Toyota Corolla has 100k miles on it and can keep going for another 150k if I treat it right.
Here’s my dilemma: My new job gives me a $6k/year car allowance “benefit” that I must use on a car than is less than 8 years old if I want to take advantage of this “privilege”. Obviously, my 2009 Corolla does not meet my new employer’s age qualification and I find myself in the unlucky position of having to shop for a newer vehicle in order to get the “benefit” at all even though my current car is in excellent shape (and I love my Corolla, too). I’d like to get a car that costs me $300/month and pocket the rest of the money, but I’m not sure that I can get a good car for $11,000 (currently 1/10 of my income) that would be presentable enough in the eyes of my employer.
I’m not sure what I should do. I work in banking and need to have a car that can cosmetically compete with those of my fellow colleagues. They went crazy with the benefit and purchased Jeep SUVs which get terrible reviews no matter the model year. My goal is to stick to the 1/10 rule since I’ll be able to pay for my car in full up front and then pocket the money coming back to me via the “benefit”. I’m not convinced right now that I’ll be able to get something that will get the job done for $11k. I feel forced into a financial tight spot even though this “benefit” is a well-intentioned one on the part of my future employer.
I need help and advice on the kinds of models I should be looking at, do I buy from a private party, what’s the best way to fit in with my future colleagues without getting overruled by emotion and going out and making the mistake of buying a brand new car. Keep in mind that I’ve only ever driven imports because American-made cars are pieces of poo and do not last as long as those of their Asian competitors. The bad part of my scenario is that most of my colleagues drive American cars (it’s a Red area) even though they are objectively worse purchases versus cars made by Asian manufacturers when factors such as fuel efficiency and price are taken into account.
Financial Samurai says
I would take that $6K, add to the $11K as I’m assuming you make $110,000, and then look for rides in the $17K – $25K range.
The 2017 Honda Accord Sport is so sweet, and only costs $23K – $24K.
A YEARLY $6K car benefit is awesome, which is why I think you can go up to a $25K car.
Thanks for the advice! The good part of this annual benefit is that I can pocket the $6k if my car is paid off – I can just take the money and invest it if I want to until I have to buy a new car again. Hope you come out with a guide on how to do your own due diligence on a particular stock soon so I can put my extra cash to work :-)
So…if you buy a 2017 car and apply $6k from the first year to your purchase, you’ll collect $6k for the next six years until you hit the eight year age limit. That’s $36k towards your next car seven years from now. Sweeeet!