I have a very clear savings goal: I would like to retire (meaning having enough money to not “need” employment) by the time I am 40 years old. I am 37 1/2 years old and, if I remain disciplined, the dream will become a reality. In order to achieve this goal I am an aggressive saver and follow all of the best advice; I make savings my number one priority and “pay myself first” each month, use a budget and net worth tracker that I update regularly, max out all of my tax advantaged accounts (401k, health savings accounts, etc.), and make additional deposits each month into an early retirement fund made up of tax free municipal bond ETFs.
I know what you are probably picturing: a 37 year old adult male huddled around a flickering candle in a tiny, run down apartment eating a single piece of white bread for dinner. However, your picture is wrong. I drive a new, small Mazda SUV, live in a 1600 square foot apartment in a luxury high rise condo in an upscale part of Montreal, take 1-2 luxury vacations per year (France/UK vacation next week with first class tickets and an Alaskan Cruise in August), and am even a burgeoning luxury watch collector (Rolex, Grand Seiko, Omega and a Nomos).
So, how do I manage to save aggressively for retirement while still living a luxury life style? By following the tips below, in order of importance:
- Make Savings a Priority. ONLY invest in luxury after you meet your monthly savings goals and have an adequate emergency fund. Not only is this going to ensure your financial well-being, it will take away the “guilt” factor of luxury purchases because your priorities will be in order.
- Understand what truly makes you happy and invest in that… and skimp on everything else. If you love to travel, make travel a priority. If charity is your luxury, include charity in your budget. Have an honest conversation with yourself of what truly makes you happy and shorten the list to the top 3 things. Seek to cut costs on everything else that is not in these categories. This will help you avoid the “luxury trap” where you feel you need the best of everything where you will waste money on things that do not provide any emotional reward or fulfillment.
- Don’t try to “keep up with the Joneses.” Focus on what makes you happy and don’t worry about what other people think. Plus, there is a very good chance that everyone else is in debt anyway…
- Set up dedicated, separate savings accounts for each of your top 3 luxury categories as identified in #2 above (I use CapitalOne360) and set up an auto deposit of what you can afford in each account every month. For example, I have a vacation fund and a watch fund. My wife has a fashion fund. You would be surprised how quickly $100, $50, or even $20 per month adds up. ONLY spend in a category if you can cover 100% of the price from money in the account. This will help you avoid debt and keep you from sabotaging your long-term savings goals.
- Wait at least 2 days before any large purchase. You will have to define “large purchase” based on your cash on hand and financial situation, but this will keep you from making impulse buys and avoid buyers remorse. I literally will wait months before making a watch purchase even if I am 99% sure I have found the watch I want to buy. Many times I have fallen in love with a watch only to lose interest a week or two later. I set a high bar by asking myself “Is this a watch I will want to wear 5 years from now?” Plus, a lot of the fun is in the research and shopping anyway.
- Take advantage of loyalty programs (especially if you travel a lot). I have Diamond Medallion status with Delta and Gold Status with Hilton Honors. Because I keep an eye out on promotions for double points or special discounts (and hoard my points) I can get 1-2 completely free (airfare and hotel) vacations per year. Traveling for work sucks but I use the points I gain to turn the travel lemon into lemonade.
Happiness in life is about balance. It’s important to sacrifice to achieve your ultimate goal of financial freedom, but if you sacrifice smartly by following the tips above you can achieve your goals while enjoying some guilt free luxury along the way.