One of the good points that Laura Vanderkam makes in her book, All the Money in the World, is that if you don’t buy the big ticket item, if you spend less on your wedding, take the cheaper vacation, buy the less expensive house, hold on to your car a few more years etc., then that money can easily buy a large number of lattes, weekly housecleaning, and so on.
Earlier personal finance books, such as those by David Bach, mention the other trade-off. By not indulging in those lattes, you can get that fancy vacation, the bigger house, the wedding of your dreams, and so on. (Of course, he also makes the point that if you’re not saving for retirement, the latte should probably go until you’re making ends meet and providing yourself a safety cushion).
Elizabeth Warren with her balanced money formula combines these two views, by saying that really no more than 50% should be going to the mandatory items like your housing, and something like 30% can go to either lattes or vacations (or both)– your choice.
What view is right? Well, it all goes to diminishing marginal utility. At some point you have had enough lattes that another one isn’t going to make you marginally more happy than saving the equivalent amount for a big ticket item. At some point with housing, your house is nice enough that rather than paying for more housing you should allow yourself little treats.
The problem, Vanderkam notes, is that people tend to misjudge the happiness they get from small daily treats compared to larger ticket items. Most people would be a little happier indulging a small amount regularly compared to having the large annual vacation. Although, with anticipatory happiness while saving for the big ticket items, those happiness numbers may be more equal than some happiness studies claim.
So should you get rid of that latte factor in order to buy the house or the vacation? Or should you buy a smaller house and scrimp on vacations so you can have a cleaning lady or Starbucks without guilt? Only you know the shape of your utility function and where it hits your budget constraint, and only you can make that decision.
Are more a saving up for big purchases kind of person or a sweat the big stuff so you don’t have to sweat the small stuff kind of person? Or has your budget constraint shifted so you can have both?