Bob and Bill are both 30 years old. They both want to buy a Tesla and they both like electric bikes. Bob figures the Tesla will bring him more enjoyment than the bike, so he spends $40,000 and buys the Tesla.
Bill thinks harder. He would enjoy the Tesla more than the bike. But he would also enjoy the bike. In fact, if he doesn’t get the Tesla, he’ll have a lot of extra cash. So Bill decides to do this. He says he’ll wait on the Tesla, but instead of getting an entry level electric bike for $1000, he decides to splurge and get a really fancy, fast, long range electric bike with all the works. This thing costs $5,000 and it’s almost a motorcycle (but still a bike, so no need to pay for insurance, etc). Bill invests the remaining $35,000 for the next 20 years. During this time, he takes full advantage of the very fun and durable electric bike. His driving costs are pretty minimal.
Now Bob and Bill are 50 years old. They are both married and they both have a son. Bill’s $35,000 investment has now turned into an inflation-adjusted $140,000 (i.e. way more than $140k but we’re gonna use 20 years ago dollar amounts in this example). Meanwhile Bob has an old Tesla. Because the price of goods (like Teslas) rise with inflation (that’s what inflation is, after all), a Tesla now costs $40,000 (inflation-adjusted). Bill still wants a Tesla, but is now in an interesting position. He could buy a Tesla for himself, his wife, and his son and still come out $20k ahead! Bob has no “extra” money and an old Tesla. Perhaps he can take out a loan and buy himself another Tesla :).
I think I’d rather be Bill. A $5,000 electric bike sounds pretty fun anyway.
So what’s the moral of this story, besides that you should hold off on buying a Tesla? There are two ways to think about purchasing something. The first is to think of the reference price of your purchase. For example: even though I might pay $2/lb for apples, there’s no way I would spend that much on bananas, because I know bananas are usually much less than $1/lb. The second way to think about purchasing something is to think of the absolute cost of your purchase. If I want to buy a computer for $1,000, I have to realize that I will be trading a full $1k in order to get that computer. There’s a lot you can do with $1,000, so you should really think about whether it is necessary to let that $1k go before you commit to doing so.
Both ways of thinking about a purchase are necessary, but people often–consciously or unconsciously–think of the first and neglect the second. Thus, someone who wants a Tesla will think, “it’s a great car and not THAT much more that I would spend on a regular car”. That’s true in terms of percentage, but it’s also multiple thousand dollars more than you would spend on the alternative car. And the absolute dollar amount that you spend or save is ultimately what affects you financial future. In this case, Bill wanted the Tesla but also recognized the absolute cost. Bill ultimately decided between splurging on an electric bike for $5,000 (he could’ve gotten a fully functional ebike for $1k or less) and splurging on an electric car for $40,000. Even though the car might provide more enjoyment, he decided it wouldn’t provide 8 times more enjoyment than the bike, even though it costs 8 times as much. In the end, he’ll be able to enjoy both of them with a little bit of patience.
Learning to think of purchases this way will teach you to allocate your “decision making power”, spending more time, thought, and energy on the large purchases that will make or break your financial future while not sweating the small stuff. Although, I would still never buy bananas for $2/lb!