Stephan asked a question in the comments section a couple of weeks ago. I made a note to myself to respond and neglected to do so.
My apologies, Stephan, and thank you for reminding me.
Here’s Stephan’s question:
Hi Byron,
I have read the old money book recently and really appreciate it. I especially liked the rule of the car purchase, 10 % of the you annual income. Do you have a similar idea or rule for a luxury watch? 🙂
I would like to have a stainless steel Rolex Datejust 36 mm, silver dial. I have looked at it for several years. The problem is I am “only” 35 years old and have saved and invested part of my salary for about 7 years (since I started work after university). Of course I know that it’s stupid thing to purchase an expensive watch like that when you’re not financial independent. (25 % financial independent at the moment).
Should I wait or may it be justified to buy one or two luxury items like this during your way to financial independence?
Many thanks in advance!
Regards
Stefan
I think this is a great question…and an eternal dilemma: at what point in time or at what financial level do we splurge and enjoy ourselves? This question reflects the dual purpose of money: to provide a means of survival for us on a daily, weekly, and monthly basis, as well as to acquire luxuries (material possessions or experiences) which we can enjoy, alone or with family and friends. Charity, of course, is in the mix, too.
To address Stephan’s question, I would say this: everyone’s financial situation is personal and unique to them, and I’d never say it’s ‘stupid’ to want a luxury item. It simply comes down to knowing the wisest moment to purchase it.
When referencing the term ‘25% financially independent’, you may want to ask yourself a few questions:
First: can I go 12 months without income and survive on my savings and investments without liquidating assets or going into debt? If you’ve got 1 year of living expenses in the bank, you’re on the road to financial independence. If you’ve got 100 grand in the bank (cash) and other assets, I wouldn’t see a problem in spending 5 grand on a pre-owned Rolex, (a 5% rule, I guess) but read on before you go shopping…
Second question: if I purchase this Rolex (uh, cash please, no credit card debt), is the expenditure going to impact any other opportunities that may be on the horizon, such as starting a business, purchasing real estate, or obtaining additional education or specialized training in my field?
If you dish out for the Rolex and then miss out on an investment or advancement opportunity, you may regret it. So think about that. If you’ve got the ‘opportunity money’ set aside, then you could be okay. (Do you have or expect children? Is their education paid for?)
Third: does a stainless steel Rolex fit into my current lifestyle? Or would it stand out as a single, possibly inappropriate luxury? Would it alienate my friends? Or would they be happy for me? If you’re socializing with other college educated, upwardly mobile young professionals, then it’s probably not an issue. Also, you’ll want to make sure that the rest of your image is in order: you’re taking care of your teeth, skin, hair, and body so these are all very presentable…before you buy a luxury watch.
Finally, ask yourself why you want a luxury wristwatch. I ask this because I’ve known probably a half dozen guys who have worked hard, saved and invested, performed and prospered. They’ve then purchased a gold Rolex (invariably), worn it for a week, and then put it back in the box and into a sock drawer. The reasons–lifestyle issues, impact on relationships, or simply the disappointment that the Rolex didn’t deliver SOMETHING that they thought it would–all contribute to this disappointing (not to mention expensive) journey.
If you simply enjoy the idea of owning a Rolex, and you’d enjoy wearing one if you were alone on a desert island with no one else around, then great. That’s the way to identify a luxury that has meaning to you. Trying to impress others is a tricky business. Better to have a long, honest conversation with yourself before buying something you don’t really want…or if you don’t know why you want it.
Of course, I’d love to hear from the tribe, and from you, Stephan. I’ve thrown out some general questions that could form a guideline for all future luxury purchases. I hope it’s helpful.
Thanks.
- BGT