If you’ve ever paid off a large amount of debt, did you splurge afterward? Or if you’re still paying off debt, do you plan to treat yourself after you make the final payment?
Nearly a year ago, a mother of two young children wrote me this letter: https://www.thepennyhoarder.co…/invest-vs-vacation/ She and her fiance had just finished paying off all their non-mortgage debt. They were struggling with what next: They wanted to save and invest more, but they also wanted to spend money on vacations. I certainly can’t fault anyone for that!
Obviously, this isn’t an all-or-nothing decision. Once you’ve freed up money in your budget from paying off debt, you can split the extra between investing and saving vs. the fun stuff, like vacations. I’d never want anyone to splurge to the point that they’d put themselves back in debt or risk their emergency savings. But I do think there’s a huge benefit in rewarding yourself for hitting a big financial goal. Treating yourself can give you the motivation to get ready for your next big goal. So while I hope that this letter writer is saving and investing, I hope they’ve also managed to take a hard-earned vacation or two.
I paid off all my debt at the end of 2020 and didn’t really reward myself. Instead, I jumped right into my next goal of saving up for a down payment. I’m not going to lie: I’m getting a bit exhausted now. Housing prices seem so out of reach right now, especially given all the cash buyers we have here in St. Pete, Florida. I still add to my down payment fund every time I get paid. But right now, I’m also making it a priority to save for a vacation and a few other splurges.
How about you? How did you treat yourself after you paid off debt? Or how will you reward yourself once you’re debt-free?
I guess I think of splurging as a percent of my net worth per year. For example, if I just paid off debt, my net worth is 0. So I wouldn’t splurge.
Right after paying off debt – there’s something to be said about building very frugal habits, and then rewarding yourself later. Good financial habits are a foundation on how your financial journey will pan out. Human beings don’t have good willpower, and so ingraining habits so it is subconscious is very useful. Here’s how you might be able trick yourself to build good habits, the easy way (without having to force or will yourself into building a new habit).
Simply put: saving more now means you can splurge a lot more later on. So it’s basically do you want to splurge less now vs. do you want to splurge more later? There’s a study on delayed gratification where basically they found that “In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment,body mass index (BMI), and other life measures”.
Some other studies have said that the original study’s affects may be overexaggerated. But I don’t think so. The cause-and-effect is very simple especially in finances. You save $1K this year. Turn it into $10K over the next 10 years. You can splurge $10K 10 years from now. You spend the $1K now – 10 years from now you have $0 to splurge (from this pot of money). Or people who are willing to ‘put in the work upfront’ usually are the ones patient enough to get so skilled at something (despite little to no rewards) and reap huge benefits after.
Anecdotally: There’s always stories of huge successes that came on the back of long-term suffering. “I worked on my startup for years with no traction and finally after years of hard work it boomed” or “I started out with nothing and worked hard for a very long time and then things came together”: a lot of these stories. But there’s virtually no stories of “yeah I just did this thing and the next day I became super rich and successful”. The latter mindset almost guarantees failures and empirically speaking nobody has achieved even close to overnight financial success, so it’s a waste of time to even try. All this to say: building the habit of delayed gratification is very important IMO.
But going back to the % of net worth splurging: I try to splurge 1-10% of my net worth (annually). So if I just got out of debt, I’d be quite frugal. And then if my net worth became $10K, I’m OK spending $1K to enjoy life ($1K, across a year). At higher net worth, like a $800K net worth or something, I don’t think I’d feel good (nor wise) about spending $80K splurging per year. At a $800K net worth, I think I’m more comfortable spending $8-$10K on myself per year, given my income and/or dividends can easily cover it. So that % I want to splurge on myself drops as my net worth goes up.
I think you should examine why you had the debt in the first place. Did you not have an emergency fund? Are you overspending on rent/mortgage, car, day care? Was it a medical issue that blind sided you.
I would not be comfortable with a splurge after a debt payoff unless I was on better footing to not repeat the debt. And splurge might mean different things to different people. (A fancy coffee? A new car? A night away at a hotel? A week at a resort? A new phone?)
I’d rather have my finances in balance (zero debt, enough to pay bills and save plus have cash in hand to spend on a splurge). Our society tells everyone to “treat” themselves and this creates only happiness for the busineses collecting your money.
Once I crush my own debt I plan on doing one thing that I think of as mental health maintenance, not a splurge; take a nice quiet trip somewhere for a long weekend. Something like a cabin in the woods with no internet, a fireplace, & a body of water nearby.
There is some psychology to wanting to splurge after paying off debt though, I think. I know I’ve had moments of thinking “I worked hard & paid that CC bill, so I deserve something nice now, right?” I think it’s fine to reward yourself & that can even increase your motivation (like why the snowball method can be great). Just don’t fall prey to the Diderot Effect! I have fallen into this cycle myself especially with my cameras. If I upgrade the lens then I obviously need better filters. If I have better filters, I should get better cases. & on & on.
Sure, I think it’s OK to splurge once in a while. Just make sure it’s a justifiable expense and that you’ll be able to pay it off interest free.
With a toddler and a mortgage, there aren’t many opportunities for me to splurge these days… And we’ll likely need a bigger house in a couple years, so planning for a future move stays on the top of my mind.
But I did sneak in a buying new guitar last year right after a big chunk of debt was paid off. My justification was I can always resell it for about what I paid. Or play and cherish it for the rest of my life. Or gift it to my son if he is interested.
Once I pay down my debt I am going back to investing. I’ve recently had to move and buy a new car. I was Ill and missed 3 months of work so I spent my savings. I also drained most of my investments & leaned on my credit cards for necessities. Things I did not want to do. But I got slammed with those situations all in one month. Now I’m playing catch up and need to rebuild my savings and emergency fund. I’m feeling overwhelmed even though a month from now I’ll be in a better position. I doubt that I will splurge I hate this feeling of being in debt. I just want my security back.
I am an old guy and can barely afford to buy beer. My life dream is to actually pay off my debt. I still have a balance on my Massey Ferguson Model 12 lawn tractor that I bought back in 1972 from Sears.
Yeah, I know Sears is closed, but I still owe them money.
Debt is a hard line to cross, seems like you never get out and when you do finally pay off something like a home, you realize you have to pay a load of taxes every year to keep something you already paid for.
Nope, never out of debt to the government, so save the pennies… do not splurge!