Supposedly Warren Buffett said this. Whether he did or not, it sounds like something he would say. This got me thinking: how much are expenses costing me in future earnings? The answer is 4.
I (or rather, my artificially intelligent friend) arrived at this number by assuming my forgone purchase would be compounded at the average S&P return rate of 7% (a very far cry from Buffett’s return rate).
The math assumes a 7% annual stock market return for 20 years. Here is the formula: (1.07)^20 = 3.87, which is about 4. This means every purchase can be multiplied by this constant of 4, and that is how much it is costing me in future purchasing power. Turns out, a haircut only costs me about $160 compared to Buffett’s $300,000 (I have some serious work to do on my rate of return).
The attentive reader will immediately start dissecting the assumptions I made. How did you arrive at 7%? Is it nominal? Real? How do you know it will remain 7% for the next 20 years? The even more attentive reader will ask: is this even the right way to think about this to begin with? To this reader, I answer: it is not.
It comes down to this: what are you saving for? It is a much better lifestyle to save for the sake of saving than to think in terms of, “I am losing $X by paying for this haircut.” It is very hard to sustain this thinking over a lifetime (you have to be someone as special as Warren Buffett). The better method is to find the reason YOU want to save. It could be for a specific purchase, it could be for a rainy day, or it could be to purchase little bits of freedom each month to reward your future self.
There are plenty of financial gurus online to tell you what ratio of savings to expenses you should have and where to invest. What is more important than all of that is to prioritize the lifestyle of spending less than you earn. From there, all other good (financial) things can flow. For me, prioritizing my future freedom is the highest priority when it comes to financial decisions. I don’t really prize shiny things much these days. I prize peace of mind and the freedom to spend my time how I like.
And if you can’t stop prizing a lot of other things? Then you’ll never be free—free, independent, imperturbable. Because you’ll always be envious and jealous, afraid that people might come and take it all away from you. Plotting against those who have them those things you prize. People who need those things are bound to be a mess—and bound to take out their frustrations on the gods.
Whereas to respect your own mind—to prize it—will leave you satisfied with your own self, well integrated into your community and in tune with the gods as well—embracing what they allot you, and what they ordain.
— Marcus Aurelius, Meditations
written by a human