The 10/10/10 rule for Purchasing Decisions
For some reason I am just hearing about the 10/10/10 rule in decision making. I stumbled upon it when I was reading an article written by Jing over on MillennialMoneyDiaries.com. In that article she suggests you should, “ask yourself how you will feel about your decision: 10 minutes from now. 10 months from now. 10 years from now.” I googled this 10/10/10 thing and apparently it’s a well known principle from Suzy Welch‘s 2010 book.
Despite my ignorance of the term, I am very familiar with the concept. I see people waste money on
crap things that don’t make them happy in the long run all the time. The problem is that it does make them happy, kinda, for a very short time. Much shorter than they realize usually.
Let’s use a new car as an example, when you get a loan for a new car it can actually be very exciting and fun. The first month with the car is pretty much the happiest that car is going to make you. But over time it just becomes a bill you have to pay, on an ever depreciating asset. Four years in and you’re actually resenting the fact that you have to spend $420 a month on an old car you don’t even like any more, especially if you were super lucky like me, and got the added bonus of it having exploding airbags ready to kill you at any moment. That was just a joy to drive around until it could be fixed. Thinking about shrapnel being hurled into my brain at 200 mph. You may even start to wonder whether you would have been better off keeping the perfectly fine car you already had and spending all that money on something else.
You do the math in your head… 48 months times $420…. $20,000! What? And I still owe another $5,000 for this used death machine? That new car just isn’t bringing you the happiness you thought it would. The important thing to consider is that “not” buying something, might just make you happier. We wrote a whole post on this: Why You Shouldn’t Buy that New Car.
Here’s the reason why; there’s a saying that goes, “Anytime you say yes to one thing, you are saying no to another.” In the Finance World we call this the opportunity cost. Spending money on one thing, means not spending that money on something else. Even buying that $5 coffee everyday from you-know-where, (rhymes with “Car Sucks”) has an opportunity cost. Meaning you could have spent that $5 a day,,, or $1,825 a year in coffee on something else, but you passed up that “something else” for the coffee.
The point is that whenever we make a purchase, we need to think about how that purchase affects our happiness, both now and later, then determine if it’s worth it. If you want a new purse that costs $1,000,,, how happy will it actually make you? Will it still make you happy 1 year from now? Will it still make you happy 10 years from now? Will it bother you that it will only be worth $100 in a couple years, yet you spent $1,000? Is there something else you could spend that money on that would have a more lasting and meaningful impact on your life? These are the questions we should be asking?
If we go back to the coffee example for a moment, that coffee does bring you joy for the ten minutes you drink it, and possibly the 30 minutes of caffeinated heart-fluttering bliss that follows. But if we think ten years down the road…. $5 X 365 days a year X 10 years….. Ummm,,,, Well, that’s $18,250 in freakin’ coffee..
Oh hell… let me just go into full hyperbole. Let’s say you buy a cup of $5 fancy pants coffee every day from age 20 to age 65. You invest it in the market the entire time with a 7% annual return. That probably won’t add up to that much right? Well it’s about $175,000. So that’s what opportunity cost is. Buying a $5 coffee everyday, means not having an extra $175,000 when you turn 65. In other words, the 65 year old version of yourself probably wants to punch the 25 year old version of you in the face for stealing his money.