Wake up Buttercup – Getting the big ticket items right

One of the narratives about FIRE that seems to constantly get pushed by naysayers (and even some advocates!) is that it requires huge sacrifices.  No luxuries, no nice stuff, a pretty bare bones existence with no room for fun.  So no coffees on the way to work, never eating out for lunch or dinner, no new clothes and shoes, say sayonara to holidays and all the rest of it.

To which I say rubbish.  Obviously it’s going to depend on your level of income, and certainly if you give up all those things it may make your FIRE journey a little quicker, but then again it may prove too extreme and you give up on it all.  The key with these sort of small but regular expenditures is to keep them under control rather than eliminating them entirely. 

The more important thing though is to get your spending on big ticket items right.  So what are they, and why are they more important?

What are Big Ticket Items?

Big ticket items are things like a house, cars, expensive private school for the kids, expensive annual holidays.  Please note here that I am not saying that you shouldn’t buy a house or a car or send the kids to private school or go on holidays.  What I’m saying is that if you are going to spend money on these things, be very aware of the cost of doing so, and ideally differentiate between needs and wants.

You need a place to live, transport to get to and from work, education so you can earn income.  You may want a bigger house or apartment, a nicer car, an education at a fancier school, but once you get beyond a basic level the extra amount you are spending is because of a want rather than a need.  Holidays are pretty much all in the want category, they are not a need.

Why are big ticket items more important?

Because they cost a lot more!  Houses are a great example of needs vs wants and making financial tradeoffs.  There are all sorts of factors which affect how much a house is worth, but two of the big ones are the size of the house (and the land) and the location. 

An extra bedroom that barely gets used can easily cost another $50,000 to $100,000 when purchasing.  Same with a media room, a rumpus room, pretty much any extra space will cost you more money.  And if you have a bigger house then you probably need more land to put it on, so that’s more money again. Similarly with location, being one suburb closer to the CBD can easily cost you a six figure sum so that it takes you 5 minutes less to get to work.  https://humbledollar.com/2018/02/the-121500-guestroom/

What about cars?  When we moved back to Australia we bought a new (yeah yeah I know) base model Toyota Corolla which cost us a low $20k figure.  If we’d gone for the top of the line model it would have been another $10k.  A top of the line model from a different non luxury manufacturer could easily be $20k more.  Go with a Beamer or Merc and you’re probably not getting much change out of $60-70k, so $40k-$50k more than what we paid.

Private school can easily be $20k a year, and if you’re going to one of the really expensive one $40k might be more like it for the senior years.  A holiday overseas for a couple of weeks can be $20k pretty easily if you have a family, more if you want to fly closer to the pointy end of the plane.

Show me the money!

So what does the math on this look like?  C’mon, you knew there was going to be math right!  Don’t worry I will try and keep it simple!

Let’s say you buy a coffee on the way to work each day, buy lunch from the food court and grab a snack at some stage as well.  You can probably get all of that for roughly $20.  Let’s also assume that you work about 250 days a year which is approximately what a full time worker would do.  $20 x 250 = $5,000. 

So not pocket change by a long way, but probably affordable for most people even if it isn’t ideal.  Again, I’m not advocating doing this, just trying to put a number on the expense and saying that it’s doable for most people although there is obviously an opportunity cost.

Let’s look now at getting the big things wrong, or at least spending more than necessary.

First of all, spending more on a house than you need to.  I want to keep this fairly realistic, so let’s say you spend an extra $100k by getting a house with one extra room in a slightly better neighbourhood that’s just a little bit closer to where you work.  And yes, obviously that price difference is going to be more or less realistic depending on whether you live in Sydney or Melbourne vs most other places in Australia. 

Having a look at cars next, you decide that you want a nice new mid tier model SUV instead of a base model sedan and there’s another $20k.  Oh and instead of keeping it for 10 years you want to keep buying the latest model every 5 years.  Also, you’re part of a couple and it’s just easier if you each have your own car so you need two of them.  Lest you think this is unrealistic this is basically every second house in my street, and I don’t live anywhere ritzy.

Then there’s schooling.  There’s a decent state school down the road which is perfectly fine, but for whatever reason you decide that your two kids need to go to a mid tier private school.  Let’s assume that’s another $10k per year per child for 12 years.  From what I’ve seen this is about a middle of the road cost for private schools, it is not at all difficult to spend a lot more than this.

Last of all are holidays.  Instead of doing a cheapish $5k holiday somewhere in Oz or SE Asia each year you instead go for a more expensive trip in Europe or the US for $15k. 

So what’s all that add up to?

In the interests of keeping it simple I’m going to ignore the effect of inflation and therefore assume everything has a constant price over time.  This probably isn’t that unrealistic as wages and core price inflation are generally pretty close to each other.  Cars may actually get cheaper over time, as have holidays to some extent.  Education costs have gone up at a rate higher than inflation, as have property values.  Let’s have a look at the numbers!

• Extra spending on a house = $100,000 (I’ve ignored the extra interest costs here, but at current rates it would probably be about another $50,000)
• Extra spending on a car = $20,000 extra for one car, then $40,000 for a car that you don’t really need.  I’ll assume that after 5 years you get back 50% of the initial cost as a trade in, and 25% after 10 years.  I’ll also add on an extra $2,000 a year for registration, insurance, extra petrol etc for the second car.  Assuming you do this over a 40 year working life that adds up to extra $335,000 that you’re spending!  Also, I’m again ignoring interest costs which would add on another chunk of money.
• Extra spending on education = $10k for 12 years = $120,000 per child.  Two children seems to be roughly the default now, so $240,000 in total.
• Extra spending on holidays = $10,000 a year for 40 years = $400,000.

So spending more on the big ticket items can pretty easily cost you over a million dollars.  And it wouldn’t be that hard to make that number a lot higher by paying even more for a property, making the car more expensive, sending the kids to a more expensive school, and having more/nicer holidays.

By comparison, the extra spending on 40 years of buying lunch and a coffee is $200,000.  And both of those are ignoring the potential earnings you could have had by investing the money instead.

The point of all of this is not to say that cutting out or cutting back on coffee and lunch or whatever your personal equivalent won’t make a difference, because of course it will, and at lower income levels it will make even more of a difference because of fixed living costs and therefore likely lower savings rates. 

Changing your savings from $40k a year to $30k a year likely doesn’t actually make a huge amount of difference as to when you will reach FIRE.  Going from $10k a year to $5k a year, well that’s likely to massively delay hitting FIRE.

What I’m trying to illustrate here though is that what is potentially far more important than the small stuff that makes life more enjoyable is the spending decisions you make about the big items like housing, transport, education and holidays.  Any one of these can easily add up to more than what you’re going to spend over your working life on buying coffee and lunch etc every day.  Spend too much on all of them, and as the below chart shows then it’s going to well and truly swamp whatever you do about your coffee and lunch.

Dave at Strong Money Australia just came out with this post (great timing Dave!) explaining that FIRE isn’t about extreme sacrifice.  It’s about making conscious decisions about what you want to spend money on, prioritising what is important and what isn’t, and acting accordingly. 

So if you make the right decisions about the big ticket items, particularly when spending more won’t make you and happier, then you can potentially have lots of the little ticket items.  Or if you find that you’re just as happy without the little ones as well, then why not both?

What are your thoughts?  If you enjoyed this post and would like to read more like it then please subscribe!