How To Balance Investing Vs. Spending

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Sometimes people wonder how to balance investing vs. spending.

There’s failure modes on both extremes (100% spend is a losing strategy, but so is 0% spend).

My personal rules of thumb:

Rule #1: Avoid lifestyle upgrades until you can afford them in the infinite time horizon.

Historically, the break-even number (i.e., matching inflation with enough buffer to absorb volatility) comes out to 3-4% of index fund holdings. 4% is historically safe for ~30 years; true indefinite safety is closer to 3%.

Rule #2. Once a lifestyle upgrade gets to the point of being almost a rounding error, force yourself to upgrade.

But the upgrade should be real, not just a flex. It should actually elevate your quality of life, not just other people’s perceptions of your quality of life.

The way you can tell it’s real is that it makes some pain point go away. The pain is a signal that there’s a real problem worth solving. It’s how you prove to yourself that it’s worth spending on a particular convenience or comfort.

Of course, following these 2 rules requires serious discipline (particularly rule #1). Much easier said than done. But for me personally it’s well worth the peace of mind.

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