Of Dollars And Data
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A few weeks ago, this TikTok video about how much a couple spends on a date night in the midwest, went viral on FinTwit (financial Twitter):
How much I spent on a date night as a married couple with a baby and a net worth of $500,000 in Cincinnati, OH #datenight #cincinnati #cincinnatifood #cincy #frugal #datenight #howmuch #fyp #fypシ
♬ She Share Story (for Vlog) – 山口夕依
But, it didn’t go viral because of the premise of the video. There’s nothing noteworthy about a man taking his wife out to dinner and explaining how much everything costs. It went viral because of how the man justified his spending. For example, there’s a part of the video where he checks his $500k+ net worth to make sure it’s okay before ordering two cocktails for $25.
Whether or not his behavior is genuine, it illustrates how some people have mental blocks when it comes to spending money. They get anxiety or have to go to extreme lengths (like constantly checking their net worth) anytime they part ways with their hard-earned cash. But, does this behavior benefit those who use it? Does extreme frugality actually prevent financial regrets?
According to the data, the answer is, “Yes”, but only in certain circumstances. As this research from New York Life explains, the top financial regrets among American adults were:
What this suggests is that it’s okay (and probably beneficial) to not spend money on something if you are still getting your financial house in order. If you have revolving credit card debt or haven’t started saving for retirement, then foregoing a $100 date night is probably the right move.
However, once you’ve gotten the big things taken care of, you probably don’t have to worry as much about every spending decision (at least from a regret perspective). Of course everyone is different, but the data suggests that most of our spending regrets revolve around messing up the big things. This is why, according to Bankrate, the biggest financial regrets are not saving enough for emergencies and not saving enough for retirement (similar to what the New York Life research found).
In other words, it’s not the person with a $500k net worth that regrets spending $25 on two cocktails, it’s the person with no retirement savings that does.
With that being said, if your financial house is in order and you still find it hard to spend money without regret, below are some techniques to consider.
I’ve spent a lot of time discussing different mental frameworks to help you spend money without regret, but I’ve never put them all in the same place…until now. My recommendation is to browse the following techniques and not think about whether any of them is “right”, but whether any of them could work for you. Let’s begin.
As I mentioned in Just Keep Buying, one of my favorite techniques to spend without regret is called the 2x Rule. The idea is that when you save for something you should save 2x the original price. So if you were going to buy $500 concert tickets, you’d also save another $500 to invest in income-producing assets. The beauty of this rule is that it is easy to remember and it will also benefit you in the future.
More importantly, you don’t have to invest the excess money. You can donate it instead. Therefore, anytime you feel like you are being selfish when you splurge on yourself, you can offset this guilt by donating a similar amount of money to a good cause.
If the 2x rule doesn’t do it for you, consider spending your money to collect what Bill Perkins calls memory dividends. In his book Die With Zero, Perkins defines a memory dividend as the enjoyment you get from mentally accessing an experience from your past. The idea is that your spending should focus on experiences not just for the initial happiness you get from it, but also from long-term benefits it will provide you when you re-share or re-live it in the future. As Perkins states:
Experiences keep on giving in the form of fulfillment from your memories: Over time, the ongoing memory dividend can sometimes add up to more experience points than the original experience provided.
So, if you think an experience will provide you with enjoyment for years and years to come, then paying up for it is probably the right move.
As also mentioned in Just Keep Buying, focusing on fulfillment, rather than just happiness, is a great way to spend your money. What do I mean by fulfillment? Something that brings you long-term value and meaning. So spending money to get a running coach to eventually complete your first marathon is something that can bring deep fulfillment even if it doesn’t contribute to your short-term happiness (running is hard).
You can take this simple example and expand it out to cover all the things you care about. Ramit Sethi popularized this approach in I Will Teach You to Be Rich when he said that you should “spend extravagantly on the things you love (and cut costs mercilessly on the things you don’t).” His approach is about identifying what really matters to you and then spending your money accordingly.
Lastly, one of the more novel ways to figure out your ideal level of spending is based on what wealth level you are at. I’ve previously defined the wealth levels based on your liquid net worth as:
These levels are based on how much you could spend while having a trivial impact on your finances. I defined a trivial impact as any financial decision that amounts to less than 0.01% (1/10,000th) of your liquid net worth. So, if you $10,000 in the bank, spending an extra $1 on cage-free eggs wouldn’t have any major impact on your finances. Similarly, if you have $100,000, then spending an extra $10 to get salmon (instead of a burger) at a restaurant would also be okay.
In both cases, you are only spending 0.01% of your liquid net worth (or less) on these extra indulgences. And, in doing so, you stay within your wealth level and prevent yourself from overspending. Using this framework, we can derive the marginal impact of a single financial decision within each wealth level as:
Note that I say “marginal” here as a way of looking at how much you can upgrade within a given experience. I’m not saying that if you are in Level 1 (<$10k in liquid net worth) that you can never go to a restaurant (since that would cost >$1). I’m just saying that, if you are in Level 1 and you do go to a restaurant, you should be conscious of how much you spend.
I like this framework because it simplifies your marginal spending decisions (and that’s where all the trouble comes in). For example, when I go to a restaurant I don’t worry about the price of my entree (since I’m in Level 3). However, I am still very conscious of how much I spend when I travel since the marginal cost of upgrades is greater than $100 per decision. In other words, I’ll be flying coach until I reach Level 4.
If the man in the TikTok video highlight above had used this framework, he wouldn’t have to check his net worth before buying two cocktails for $25. Since he knows his net worth is above $250k, he can spend that extra $25 with ease.
There’s no right way to spend money. After recently posting about inheritances and spending in retirement, I know just how true this is.
However, there are ways to make it easier. Whether that means using a rule, focusing on your values, or collecting more memory dividends, spending money can (and should) be enjoyable. After all, what was the point of saving all that money in the first place?
Happy spending and thank you for reading!
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This is post 313. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
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Of Dollars And Data focuses on personal finance using data analysis. Nick Maggiulli is the Chief Operating Officer for Ritholtz Wealth Management LLC. For disclosure information please see here.
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