When Is The Right Time To SPLURGE?

when is the right time to splurge

I want To discuss about when it’s okay for you to go out and be able to splurge and buy things that you want, not that you necessarily need. The way I like to break this down is into 3 phases of building wealth.

Establishing Financial Foundation

In this initial phase, the focus is on laying down the groundwork for financial stability and security.

Phase 1 is really that foundational phase. In this first phase of building wealth, you have to start by saving a little bit of money.

You need to have the first $2,000 in the bank to protect you against an emergency. This isn’t $2,000 in the stock market, it’s $2,000 in a savings account specifically for emergencies, not for buying a TV, a car, or anything else. It’s to protect you against an emergency.

If you can put aside an extra 2 and pay down your credit card debt in this phase, you are not allowed to go out and spend money and splurge at all.

If you have credit card debt or if you do not have $2,000 saved up, you need to be extremely careful with how you spend your money. You have to get past this phase 1 as fast as possible.

If you don’t have 2 grand saved up and you’re in credit card debt, you’re in the financial danger zone.

You have to get past this before you can worry about spending money on anything luxurious or non-essential because right now, you are making everybody else rich at your expense.

Keep your money in your pocket, but in order to do that, you have to keep your money for yourself.

Use your money to keep savings, use your money to pay down this credit card debt as fast as possible. Then let’s move on to phase 2.

Also read : How To Save Emergency Funds Fast | Money Saving Tips

Building a Financial System

Having completed Phase 1, attention shifts to creating a structured approach to managing finances and investments.

Phase 2 is now that you’ve already done phase 1, you’re starting to build a financial system.

1 thing I like to talk about is maybe you follow something like a 75/15/10 plan, which says that for every dollar you earn from here on out, 75 cents is the maximum you can spend, 15 cents is the minimum you’re investing, and 10 cents is the minimum you’re saving.

The savings money you’re putting aside, this 10 cents, is money to protect you against an emergency.

Your goal is to have somewhere between 3 months to a year’s worth of savings put aside to protect you against an emergency.

Again, this is not savings to buy a car or make a down payment on a home, this is savings to protect you in case something goes wrong. Then, 15 cents of every dollar you earn, 15% of your income, is going into your investments.

Now, you might be asking,

“What are these investments?”

These could be investments in your income, your career, paying down your debts, other consumer debts, or investments in the stock market, rental properties, anything that’s building your wealth. And then, the remaining 75% of your income is the maximum you can spend.

Once you achieve phase 1, now you have more money to spend because in this phase, you want to have as much money as possible to save your $2,000, pay off the credit card debt as fast as possible.

The most financial sacrifices are going to be right here.

Once you get to phase 2, now you have 75% of your income to spend, and some of you might say,

“How in the world am I going to live off 75% of my income?”

Well, if you want to become wealthy, you cannot spend 100% of your income, period. And I know this is going to be tough, but if you really can’t figure out how to spend less than what you make, you’re going to have to do 2 things: figure out how immigrants live because immigrants can live off very little money, and figure out how you can earn more money.

Maybe that means you have to invest money to get a new certificate, a new job, or a new career so you can go out and get more money. Because you have to have the ability to spend less than what you make, and you don’t want to be spending 100% of what you make.

You want to be putting at least a quarter of every dollar you earn aside to make you wealthy, into your savings and your investments.

So now, during this phase, you’re starting your investing and you’re starting to pay down your non-mortgage debts, things like your student loans, car payments, etc.

At this point, if you want to buy yourself a nice $10,000 Rolex or something that you don’t need, at least you’re not in the danger zone anymore. But if you want to do that, fine, but you have to make sure you can afford it first.

What does it mean to really afford these non-necessity luxuries?

The way that I did it for myself is I follow the rule of 5, which is if I can’t buy 5 of them, I can’t afford 1 of them, especially in this phase. That’s tough.

If I want to buy a $10,000 Rolex, that means I have to have at least $50,000 put aside in cash before I can go out and afford that $10,000 Rolex.

If I want to go out and buy myself a $60,000 car, I better have a lot more money put aside. I better have $300,000 put aside before I can afford the $60,000 car because I’m not financing cars. And you’re going to say,

“that’s not practical.”

Well, what do you want first? Do you want to have the BMW in your driveway, or do you want the investments that are paying for your BMW? And that’s where you really have to decide what’s more important to you.

Yes, it is difficult. Yes, it takes sacrifice, but it is also possible if you can stay disciplined and stick with it. I call it a decade of sacrifice.

The things that I’m talking about are not things you’re going to do overnight or things you’re going to do in 6 months.

A decade of sacrifice is putting in a decade to spend less and earn more so you can invest like crazy because after ten years, you can see significant changes to your financial situation.

You and your family can be in a whole new tax bracket, a whole new wealth bracket, and you can set up not just yourself but your family and generation after you for a completely different lifestyle. But that requires you to make some sacrifices.

Now, if you want to buy a car, fine, buy a car that you can afford with cash, which means for the next few years, you might be driving around in a used Toyota Camry, a used Toyota Corolla, or a used Honda Accord, even if you’re used to financing a BMW 4 Series. That is very difficult, but if you can do that, well, that’s more money for you to be investing your money.

Read more : 3 Signs The Middle Class Is Financially Screwed (And How To Fix It)

Achieving Financial Freedom

In this advanced phase, the goal is to attain financial independence and the ability to sustain desired lifestyle choices through investments and cash flow.

Phase 3 is a little bit different. Phase 3 is now where you’re working to pay down the rest of your consumer debts.

You no longer have your student loans, you no longer have your car payments. You’re also working to pay down your mortgage here as well. But because you’ve been investing your money, now your investments are starting to get to the point where

they can fund your expenses. I like to invest my money for cash flow. Cash flow is when you invest your money in the stock market, generating dividends every 3 months, getting cash deposited into your account.

These dividends are constantly reinvested until this cash flow is enough to cover your basic living expenses. And it’s not just in stocks where you can get this; you can also get this cash flow from real estate. You go out and invest in rental properties that are cash flowing.

You’re buying single-family homes, apartment complexes, office buildings, whatever it might be for the purpose of generating cash flow each and every month.

Once this cash flow that you’re generating is exceeding your expenses, now you can take your foot off the gas pedal, and you don’t have to keep reinvesting so aggressively in this because now this cash flow can cover your expenses.

The money that you’re generating from your job, your business, everything else is just supplemental.

Now, at this point, when you can buy the things that you want, like that $10,000 Rolex or a nice BMW, and buy whatever nice, expensive thing, you can pay for it from your cash flow, from your investments.

Now you can afford it because it’s not coming out of your hard-earned money.

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