When Should You Loosen the Purse Strings?
It is difficult to know when you should ‘loosen the purse strings’ on your budget. Recently, my wife and I were having this exact discussion. Honestly, it takes years to create a lifestyle that is conducive of accumulating wealth. Yes, often the rules are simple…live below your means, save, invest, blah, blah, blah. In reality, it is much harder than that.
As you grow in your profession and income you will continue to feel the pressure of societal expectation to spend more. It takes strong-willed individuals and couples to fight this temptation and continue to execute their financial plan. However, we cannot live this frugally forever, can we? There is a healthy dose of frugality that many who seek financial freedom must maintain, but there are times and scenarios when it is appropriate to not be so damn stingy. So, when should you loosen the purse strings?
Financial independence is a mentality
Before we discuss when I think it is appropriate to loosen the purse strings, I think it best to address how we got here.
My wife and I are currently in the process of eliminating our combined $670,000 educational debt. We have written an extensive financial plan that we work to execute every day. You can see how much headway we have made by checking out our post graphing our loan repayment progress. In order to achieve many of our financial goals, we have forced ourselves to develop a certain mindset. Even with a healthy dual-physician income, eliminating debt and pursuing FIRE takes all the same values required of becoming a doctor.
It takes dedication, perseverance, patience, intelligence, common sense, and a whole lot of grit to make this financial mentality habitual. As such, as a family, we work tirelessly to polish our budget, live on less than we make, and divert much of our excess income towards debt elimination. The process of this is rewarding in its own right, but we are still human.
It can be difficult to look around at our friends, colleagues, and coworkers as they share stories of their new home, their nice car, or their lavish vacations. Despite knowing we are doing the right thing for our financial situation; it doesn’t make it any easier. As I am on the precipice of starting my attending career at an academic hospital, I have been reflecting on when it is appropriate to ‘loosen the purse strings,’ so to speak, and allow us to spend a few extra dollars.
The 10% rule
I cannot take credit for the 10% rule. I originally read about this rule in the book The Physician Philosopher’s Guide to Personal Finance by Dr. Jimmy Turner. In a section of the book, he argues how to avoid lifestyle creep to a significant degree. To paraphrase, he suggests that when you receive an increase in salary (i.e., a pay raise, promotion, bonus, etc.) that you should only use 10% to increase your lifestyle. The other 90% should go towards retirement savings and investments.
I like the 10% rule and utilize it in my own life. It strikes me as a good compromise. This rule allows you to put a not insignificant portion of money into your budget while still prioritizing the financial power of substantially increased savings.
If you want to read more on this topic, Dr. Turner has written an article that goes into more detail. You can find this in his book as well.
OK…now that we have some preface out of the way, lets talk about when you can allow yourself to loosen those purse strings.
Achieving Financial Independence
The first situation where I would advocate for ‘loosening your purse strings’ would be reaching your financial independence number. Let me explain. The definition of financial independence is essentially having enough cash flow from your savings, investments, etc. that you no longer need the income from a job to support you for the remainder of your life.
What does this look like in practice? Well, if you plan to live on $100,000 annually in your retirement, a simple rule of thumb is the 4% rule. The 4% rule suggests that you need enough money in savings to withdraw at a rate of 4% annually (assuming a stable market, steady inflation, and a remaining lifespan of 25-30 years). Using this example, if your plan is to live off of approximately $100,000 annually, then you would need a nest egg of roughly $2,500,000. This 2.5-million-dollar nest egg would allow you to withdraw 4% (i.e. $100,000) annually and sustain yourself for the remainder of your life (25-30 years).
It is worth noting that the example I have just provided is for retirement specifically. For my Financial Independence, Retire Early (FIRE) individuals, these numbers can be altered to support an earlier retirement. Dr. Leif Dahleen of Physician on Fire was able to completely retire from medicine at the age of 43! That is the power of a FIRE mentality.
The ‘tiers’ of financial independence
I think that if you have reached your financial independence ‘number.’ Then you need to consider allowing yourself to loosen the purse strings slightly. Now, there are ‘tiers’ of financial independence. These are often labeled ‘thin’ financial independence, or ‘fat’ financial independence. These primarily describe how much worth you have accumulated beyond your financial independence ‘number.’ The more you accumulate, the more luxurious your lifestyle can be.
In keeping with the example above, if you continue to work after you have already saved up $2,500,000 then every penny earned over that amount is icing on the cake! You can loosen those purse strings! Just make sure you do not loosen them enough to jeopardize your retirement plan.
Being overly frugal
One thing I try tirelessly to avoid is being overly frugal. I do take a sense of pride in my ability to keep our family on track regarding our financial plan. I get a sense of joy when we can mark a financial goal as completed or graph a significant contribution to our finances all while maintaining our lifestyle. However, it should be noted that there is a fine line between frugality and expense avoidant.
It is easy for me to imagine being so fixated on a financial goal that I am blinded to the realities of day-to-day expenses. Look, if it is time for new tires on your vehicle, buy the tires. Don’t wait around for a flat just to postpone the expense. If a necessary appliance in your home is faulty, don’t shop around for weeks on end ‘looking for the best deal.’ Just purchase the most reasonably priced item and get back to your life. It is one thing to avoid indulgences, it’s another to avoid spending entirely.
If you find yourself being on the latter end of this expense avoidance spectrum, maybe it’s time to loosen your grip on the budget.
On track with your financial plan
The previous scenarios are relatively clear-cut. However, if you feel the pressure of a tight budget and are on track with your financial plan, there may be room to relax as well. I have previously written a post on How to Write a Financial Plan. A financial plan is basically a financial roadmap of sorts. A well written plan can help you utilize your money wisely, both in the present and the future.
My financial plan describes how I will eliminate my debt, how I will invest, how to save for big ticket items, etc. You do not need to have achieved everything on your financial plan to allow yourself to enjoy your income. If you are living below your means, budgeting appropriately, saving appropriately, and have an emergency fund, then you likely have room to relax.
A well-written financial plan is a living, breathing document. It may change as your income does or your priorities change, but it should be your compass as your save towards success. In order to maintain your motivation (as it applies to savings) allow yourself to increase your budget by a small portion. It’s ok to treat yourself from time-to-time.
Saving more than 20-25%
After-tax savings are equally as important as adherence to your financial plan, and arguably part of your plan anyways. Many personal finance writings recommend saving approximately 20-25% of your take-home pay to build a healthy sized nest egg as you work towards retirement. For some pursuing FIRE, this portion may need to be closer to 40-50%. If you are planning on retiring in your 40s-50s, you need to be saving a larger portion, it’s simple math.
However, for those still looking to work into their 60s (and beyond) then I would argue you have the opportunity to loosen your purse strings if you are on track to meet your retirement goals and saving 20% or more.
This recommendation is not rooted in any substantial literature other than my own opinion. As physicians, we dedicate our lives to our patients. We often have to be incredibly selective with where we offer our time and money as both are limited resources, especially if you have plans of retiring to a similar lifestyle. As such, saving a large portion of your income should be rewarded. The monetary reward is obviously the long-term benefits of interest. I do believe that allowing yourself to spend slightly more as you approach retirement is important as well.
Mental, emotional, and spousal well-being
The last topic of discussion has to do with money’s effect on our mental and emotional selves, as well as on our significant others. Money (much like religion, sex, children, and politics) can be a pressure point for many. There are often frustrations that arise when internal or external expectations of money differ.
With each passing year, I have found it more and more important that both partners in a relationship be on the same page when it comes to finances and fiscal philosophy. It is critical that both parties understand their current financial footing and why they make specific choices with their income. If only one individual in the family manages the household finances, it can lead to misunderstandings and even resentment.
I understand completely that it is commonplace for a single individual to manage the finances of a home. However, that process should be as transparent as possible. This is why I advocate for financial ‘dinner dates.’ Yes, there are times when living frugally is necessary. Yet if it is beginning to affect your individual happiness or your relationship/marriage, it may be appropriate to ‘loosen the purse strings.’ Delaying when you reach financial independence may seem difficult, but it is still an exponentially better decision than divorce, financially speaking.
Take home points
There is a fine balance between fiscal responsibility and expense avoidance. We have discussed some situations where it may be appropriate, or even necessary to ‘loosen the purse strings’ and allow yourself to live less stringently. Reaching financial independence, retiring, staying on track with your financial plan, prioritizing significant savings, and avoiding stress on your health and relationships are all scenarios where I think it is appropriate to loosen the financial spigot.
It can be difficult to know if you are intelligently budgeting and saving, or if you are overly limiting your lifestyle. Fortunately, if you are reading this, then something tells me you are already on the right track! You also have the freedom to play with the budget. If you are unsure if you have overly tightened your expenses, then allow an extra 5-10% into your budget for a month. See how this amount affects your savings. Does it cause you to be happier? Did it allow you and your significant other some much-needed breathing room? Are you able to still keep track of your financial plan? If so, then continue to make small changes in your budget to find that financial ‘sweet spot.’ Remember, everything is a trade-off, but your happiness and well-being should factor in that equation. As always…
Stay Motivated!
The Motivated M.D.
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