“[E]very person, unless they were born with wealth, must serve a financial sacrifice period if they live a normal lifetime. Furthermore, everyone has the option to either serve that sacrifice period while they are young and healthy or they can wait until they are old and sick.”
Jim Napier, Invest in Debt
I have some bad news. Unless you have gobs of family money, you will have a period of financial sacrifice at some point in your life.
But, I also have good news. You get to choose when you sacrifice. You can do it now, when you have a clear mind, energy, and control over your circumstances. Or, you can overspend now because you “deserve it,” and lock yourself into a period of financial sacrifice in your old age.
Why does this financial truth occur? It results from the simple yet powerful force called compounding. Here is how it works.
If you choose to buy a $30,000 car today instead of a decent used car for $10,000, the cost difference is NOT $20,000.
In 10 years that $20,000 invested in an asset that returns 10% per year would be worth $51,875. In 20 years, it would turn into $134,550. In 30 years, it would balloon into a massive $348,988!
So, if you bought the more expensive car at 30 years old, you really did sacrifice $348,988 when you turned 60. If you financed the car, you did even worse.
This problem is called an opportunity cost because you missed the opportunity to invest your money in something more profitable. But, big purchases aren’t the only issue. Smaller recurring weekly and monthly purchases also turn into big opportunity costs over the long-run (see the Rules of 752 and 173).
The cumulative effect of too many missed opportunities (lack of financial sacrifice) means that most people nearing retirement age do not have enough saved to support themselves. I was shocked to read a report from the National Institute on Retirement Security which found that the median retirement savings of all Americans nearing retirement age was only $12,000!
Rental Property Analysis
A course by Coach Carson that teaches you how to run the numbers so that you can confidently analyze and buy profitable rental properties. It also includes Coach’s rental analysis spreadsheet. Get the CourseAccording to a 2014 report from Vanguard, even those wise people who do have retirement savings at Vanguard only have accounts that average $101,650 or have a median balance of $31,396. All of these figures point towards looming periods of financial sacrifice in these people’s older years.
I am not against buying fancy cars or stuff. I am just for making financial decisions fully aware of the true sacrifices of these purchases. If you know the true long-term cost and still want to spend the money, go for it.
But, please do remember that period of financial sacrifice. The statistics are ugly.
If you spend and live like the average people in society before retirement age, your sacrifice period will no doubt come at the end of your life. Even if you don’t live in poverty, you will have to either keep working or adjust your lifestyle expectations down in order to make it.
One reason to live more frugally early on is because you can get creative and have fun with it. Compared with the averages, my own life during the last 13 years since graduating from college has technically been a financial sacrifice. I have only bought $3-5,000 cars, lived in a 4-plex or a fixer-upper house at times, and avoided personal debt.
But, I really have a hard time calling this period a sacrifice. It’s been a blast. I have had fun as an entrepreneur, controlled my daily schedule, taken mini-retirements, and lived a very free existence. At least for me, a deliberate period of financial sacrifice early on is much more enjoyable than a forced one later in life.
So, I’ll leave you with the important question. When will you experience your period of financial sacrifice? The choice is yours.
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Great post and critical topic. I like to think in therms of when my passive income per month exceeds my minimum necessary to live amount. Another author of lifestyle vs work are the lifeonaire guys (search on amazon).
Thanks Curtis. I agree, this topic is super important. And you’re right, in this game it’s ultimately about building up enough passive income to cover that personal expense number. That is more exciting than the $30,000 car to me!
Awesome article, I didn’t see it exactly this way at first, your exactly right! So its more than just wasting 20k its wasting what could’ve grown to be 50 or 200k down the road, if only they taught this in school, but its still not too late to make this a guideline when spending mula, thanks for another great article!
Thanks for the comment, Tino! Yeah, it’s one of those lessons that is not intuitive at first. There is a lot of enjoyment from the purchase, but the only way I’ve found to counteract that is to really calculate that opportunity cost and have that big future number stare me in the face! It tends to open my eyes.
Great post Chad!
We have lived frugally in our early years, but we still must discipline ourselves to invest that money for the future or else it may all be for nought.
Yes, indeed. It is a long haul. I think sticking to a plan for the long haul also includes spending lavishly on the things most important to you. For me at least, it’s not stuff but experiences with family and friends.