The Mighty “10 Rule”

(Article by Matt Alden S.)

We all want to save a bit more money, but it’s not particularly fun trying to pinch every penny. Life shouldn’t be about a list of things to avoid and not do- it should be entertaining! Knowing when and where to spend money, and when not to, is a deeply personal thing, but here’s a really simple “rule” to keep in mind when you’re buying anything.

Instead of keeping a formal budget, this is basically the only frugal rule I follow for myself:

The Ten Rule

Due to the time value of money, and the opportunity cost, the ten rule is this:

Anything you buy today, your future self is paying 10x as much for. So add a zero onto the price tag, and ask yourself if it’s still worth it. If it is, buy it and enjoy it. If not, then forget it!

The math behind it is fairly straightforward. The historical rate of return of the S&P 500, the most common benchmark for the stock market and index funds that follow it, is around 9% per year. Equities are a decent investment to stay ahead of inflation over the long term, since the rate of return is generally superior. This is primarily because when prices rise, it’s those companies that are the ones raising their prices while also using their profits to grow their businesses and pay dividends to shareholders. Jeremy Siegel, a professor of finance at the University of Pennsylvania and author of Stocks for the Long Run, has argued that stocks consistently return around 6.6% per year after inflation over a long period of time. Of course, there will be volatility over the short and medium terms.

If we round down, and suppose that stocks offer a rate of return of 9% while the inflation rate during that period is 3%, then we’re looking at a real annual rate of return on our purchasing power of 6%.

For every dollar you have today that you let compound at a real rate of return of 6% per year, you’ll have slightly over ten dollars in 40 years. This is according to the historical performance (which we can never be projected into the future for certain), and is adjusted for inflation to represent a real tenfold increase in purchasing power.

The opportunity cost of every purchase is that you could have invested it in an index fund or another investment. Every dollar not invested today, is ten dollars that is missing from yourself 40 years from now. If we take care of our health, and live past the average life expectancy, we’re talking a life of 80+ years and still active. (I don’t know about you, but if I’m not skydiving and doing crazy-ass things when I’m 80, then something went terribly wrong.) So 40 years isn’t as long as it sounds.

If you bump the time period down to 20 years instead, then it’s the “Three Rule”- everything is three times as expensive because over a 20 year period of 6% real annual returns, the purchasing power of an investment more than triples.

For a person with a decent income, these decisions throughout a lifetime result in a seven-figure difference in the wealth you’ll have as you grow older.

How Not to Go Crazy

According to the Ten Rule, if you buy a new car today for $20 grand, then your future self is paying $200 grand. That $800 computer is $8,000. The $50 dinner for two is $500. Karate lessons for $150/month are $1,500/month.

This arguably makes everything look like it’s not worth it. It’s easy to see how someone who takes this to heart a little bit too well could go a bit too far over the crazy line into hyper-cheapness.

This is the kind of internal math that wealth-builders do compared to those that never seem to really accumulate a high financial net worth. But wealthier people are not necessarily happier, so it’s important to have the right balance of priorities that fits your goals.

Do a Satisfaction Audit

Figuring out what makes us happy before a purchase can save a lot of money over the long term. Before applying the Ten Rule (or the Three Rule) when making buying decisions, it makes sense to do an audit ahead of time.

For at least one whole week, keep a journal. Personally, I’m not much of a journal-type guy, but I can do anything for a week. So for seven days each evening, write down the happiest parts of your day. What were the peak moments? What were you doing and who were you with? Were the driving forces of that moment material possessions or experiences? During the audit, use an eighth journal entry to look back and write down the happiest dozen or so moments of your whole life. Ask yourself the same types of questions- who, where, what, etc. Were they material things, experiences with friends and family, or personal accomplishments?

Having this all down in writing gives something quantitative to work with. You’ve got hard proof now of what really makes you “tick”. For most of these peak experiences on the list, especially the lifetime ones, they’re experiences you probably wouldn’t undo even if they were more expensive, within reason. Price basically isn’t an issue then. The time you traveled to another country and it changed your perspective on everything- probably totally worth 10x what you spent. The first date with your partner- I doubt you’d eliminate that if it cost 1000x as much, let alone 10x. The guitar you bought and learned how to play on- basically priceless right?

These vary based on your interests of course, but the point is, there are essentially priceless things that blow past the Ten Rule. Looking forward, those are the things that will likely continue to pass the Ten Rule test. If there aren’t a lot of material possessions on these lists, then apply the Ten Rule hard to scrutinize them in the future.

Define “Enough” and Clarify Goals

As you read personal finance blogs and try to save and invest more money, what specifically are you looking to do with the rewards? Retire 10-15 years from now? Become a millionaire?

There are experimental banks where the interest generated from the savings accounts is pooled together and used to offer prizes to a subset of the savers. In other words, rather than earning a 1% return on your money, the bank pools the interest together and says, “three people win iPhones this month”. The goal is to emulate the popularity of lotteries to try to get people to save more. It’s a “no lose” lottery in the sense that their savings are safe; it’s just that the miniscule interest is pooled together in an offer that psychologically may increase savings rates among people.

The way to apply this concept to your situation is to think on the big side. You could just go by the numbers and realize you could be wealthy, you could have more freedom, you could travel more, but these answers are like the 1% compound interest since they’re predictable but maybe not acutely motivating. Another way to look at it is that if you had enough excess capital, you could do things like open your own business, live in another country for a year without thinking twice about the money situation, start your own charitable organization, and big changes like that (the “iPhones”, bigger events). Any of these things can be accelerated based on your risk tolerance or dedication, but having a healthy buffer of liquid wealth and cash flows makes them easier.

By thinking big about your potential opportunities several years from now, it can alter priorities and allow the Ten Rule to work its magic.

What about you? If you do the Satisfaction Audit, or you’ve already known the answer, what are your results? What things are priceless to you?

Matt is the publisher of Dividend Monk, a blog that focuses on dividend stocks, as well as personal finance, index funds, value investing, and general economics. He’s also working on a new project called Stoic Insights, a personal development blog with an analytical focus on practical things like eating healthy, becoming more fit, enhancing productivity, and building wealth.

[Photo by Cappellmeister]

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  1. Tony@YouOnlyDoThisOnce January 17, 2013 at 6:41 AM

    Great post. “Adding a zero”. Hmm… i am going to have to try that! I think that will lead me to buy nothing!! Either way, these are some great tips. Thanks!

  2. Jane Savers @ The Money Puzzle January 17, 2013 at 7:11 AM

    Adding a zero is the simplest formula I have seen. I tend to think of things in terms of how long I have to work today to pay for things. For instance take out chinese is 20 minutes of work, cable/internet/phone is 7 hours each month.

    Instead I should consider the $6.00 that I, all too frequently, indulge in is actually $60.00 in my retirement future.

    This math is giving me a gut ache this morning. Thank you.

    1. J. Money January 17, 2013 at 7:42 AM

      haha… sorry about that ;) But I love that you compare things with the amount of time you have to work like that! It reminds me of my friend who used to measure time with cigarettes actually (aka it takes 3 smoked cigs to get from point a to point b) – I’ve never forgotten that. Actually, I think I wrote a post on it before, hmm….

      Yup, here it is!

  3. Mrs. Pop @ Planting Our Pennies January 17, 2013 at 7:14 AM

    I think the satisfaction audit would probably show that I’m happiest doing things that are already “free” for the most part – taking walks with my husband, hanging out with the cat, etc. Simple pleasures. =)

    1. J. Money January 17, 2013 at 7:43 AM

      Me too I think :) I can take 10 walks a day and STILL want more of it! Which is why I don’t care for winter much – I’m cooped up in the house all day and I need one of those indoor tracks that gyms have, haha… though even that isn’t as nice as walking outside in the scenery, wha wha…

    2. Matt January 17, 2013 at 5:24 PM

      I agree.

      One of my favorite quotes is from Ralph Waldo Emerson:
      “Give me health and a day, and I will make the pomp of emperors ridiculous.”

      A person generally can derive the most satisfaction from the simplest things.

      1. J. Money January 18, 2013 at 9:53 AM

        Haha… good one.

  4. Lance @ Money Life and More January 17, 2013 at 7:19 AM

    One of our local banks is doing the experimental bank route where they give away things like xboxs, laptops, iphones etc. I don’t think it caught on because they aren’t advertising it anymore… it was a strange idea from the start.

    1. Matt January 17, 2013 at 5:14 PM

      It would be interesting to know what demographics they were targeting with the advertising. It could be that the idea didn’t catch on due to general disinterest, or it could be that they were targeting the wrong groups (like people that are already saving money).

  5. William @ Drop Dead Money January 17, 2013 at 7:53 AM

    Awesome post! Warren Buffett used this rule for most of his life, which is why he kept wearing cheap clothes, drove a cheap car and ate at McDonalds.

    1. debtgirl January 17, 2013 at 5:50 PM

      Really? I love that guy!

      1. J. Money January 18, 2013 at 9:54 AM

        Doesn’t he still live in the same house he bought like 40 years ago too? I know he used to at least – that guys’ a pimp!

  6. Bridget January 17, 2013 at 8:18 AM

    I am a penny pincher, but after reading your post I just want to see what I can get for free. LOL

    1. debtgirl January 17, 2013 at 5:50 PM

      That would be easy to and a zero too! ;-) Love it!

  7. AverageJoe January 17, 2013 at 8:26 AM

    I’m interested to see how these experimental banks work. Part of me thinks that working with people’s psychological desire to “win” is brilliant. The other part of me (sounds like I’ve got multiple personality things going on, huh?) thinks that with the distrust of banks, this’ll fall flat without the right marketing push.

    1. J. Money January 18, 2013 at 9:57 AM

      I can tell you that TONS of people love entering giveaways/sweepstakes too – it’s crazy. We launched only a few months ago and have tons of people signing up and entering our giveaways every week. On the other hand the stuff we’re giving away is much more unique and fun than an iPod or other tchotchke, but it still goes to show people love getting lots of stuff for free!

  8. Grayson @ Debt Roundup January 17, 2013 at 9:47 AM

    I have never thought about the 10 rule, but I love it! I can see how if you did this on everything, you would not purchase anything. I would use this rule just on my “wants”.

  9. Joe @ Retire By 40 January 17, 2013 at 9:57 AM

    Adding a zero will make me not buy anything. We’re going to Burgerville for lunch today. They have a 2 cheeseburgers, fries, and drink for $5 today. I would never pay $50 for that. We haven’t gone out for 10 days so I think $5 is fine. Adding 0 might work for regular people, but for frugal folks, that will just make them hoard all their money. :)

    1. J. Money January 18, 2013 at 9:57 AM

      Haha…. right?

  10. Sean @ One Smart Dollar January 17, 2013 at 10:51 AM

    I love this concept. While I am definitely frugal I have my things I like to spend money on (vacations, good food). I do tend to think about most larger purchases that I have. I make sure that it is still something I am going to really want or need a month down the road.

  11. Financial Black Sheep January 17, 2013 at 11:24 AM

    There are so many concepts helping people make buying decisions, but usually compared to hours spent working. Since my investments make nowhere near 6%, I would have to argue that I don’t see the point of adding a “0” to what I buy. I don’t see the point of making a $2 cheeseburger $20 when I only get one maybe once every few months when I have a little “me” money. Maybe this works on people who don’t have an allowance like I do?

    Now on the other hand the happiness journal is a great way to indulge in meta-communication, and help oneself see where true happiness lies. Whether it is the form of 20 minutes of video games (during the week, yes please) or a trip to a new state (last weekend, oh hell yes). I am still not quite convinced this would work in full, because I spend 85% of my time during the week working on school work, reading, writing, and learning, so it would be hard for me to see other such happiness indicators, except for the occasional bike ride, cat snuggle and hug from my husband. All things that if I didn’t like without the journal, none would be around today. Just saying, not sure this would help me in any way.

    1. Matt January 17, 2013 at 5:26 PM

      If someone finds that giving themselves an allowance works for them, then this way of looking at things can potentially help determine how large that allowance for spending should be. But then once that allowance is decided upon, the thought process probably shouldn’t be used on individual purchases. It’s all about testing what works.

      If someone’s rate of return is on the lower side then they’d have to tone down the rule to perhaps the ‘3 rule’.

      1. J. Money January 18, 2013 at 9:58 AM

        How much would a hug from J. Money be worth? :)

  12. Rod J Rogers January 17, 2013 at 11:45 AM

    Here’s another interesting twist: If you’d bought property in 2000 for $100,000 and sold it for $150,000 in 2005, you’d have $50,000 profit, Right? WRONG. Inflation ate up the value of the $50,000’s purchasing power – you broke even, BUT, you were taxed on the $50,000 ‘profit’; leaving you with a net LOSS of $8,000. Moral: buy what you enjoy, now; your money will be worth less later.

    1. J. Money January 18, 2013 at 10:01 AM

      And that’s just when prices go UP. If you’re in a situation like me and millions of others who have lost thousands of dollars on our homes it makes everything that much worse.

  13. Barbara Friedberg January 17, 2013 at 12:40 PM

    This article lays out major investing topics in a clear and straightforward way. The 10 Rule is a great wake up call for those mindless spending times. You can’t get away with overspending now and having wealth in the future. This article is great motivation.

  14. Anne @ Unique Gifter January 17, 2013 at 1:43 PM

    I’d call the 6% return not adjusted for inflation, in all likelihood. With current rates likely to stick around for awhile, maybe the $5 or $8 rule?
    It is a decent way to look at things, though. NPV is usually lost in day to day decisions.

    1. Matt January 20, 2013 at 6:28 PM

      It depends on what one’s investing strategy is and also on unforeseen macroeconomic events over the next several decades.

      Historically, a 6+% stock market return is already adjusted for inflation based on the 9+% historic stock market rate of return and average inflation rates. When I make an investment, I aim for a total rate of return of 10% or better, and an inflation-adjusted rate of return of 7% or better.

      The conservative approach for financial planning for the future would be to underestimate the long-term returns over the next several decades and assume that stock returns will be below the historic average. Better be safe than sorry!

      But the conservative approach for using the 10 rule today would be to actually assume that stock price returns would be aggressive, because that would increase the multiplication figure of the cost and, hypothetically, reduce one’s expenditure today by making things appear more expensive (therefore resulting in increased savings). The 10 rule assumes historic stock returns and is optimized to be easy to remember: nobody wants to multiple a cost by 8 in their head on the spot but everyone can quickly add a zero to a price.

      The rule would have to be modified by individuals that are much further along on their retirement path (like the 3 rule), or if an individual invests in lower-returning assets than the ones used in the calculation of the article.

      1. J. Money January 21, 2013 at 4:19 PM

        Agreed!! If this were called the “8 Rule” it would already be too confusing to really care about trying, haha…

  15. Brian January 17, 2013 at 2:01 PM

    You know, I hadn’t heard of this concept before. Definitely puts into perspective spending an extra $100 or $200 a month on rent, jeesh! Granted I don’t spend much money anyway these days but still, next time I look at something I really want, I’ll be thinking like this. Usually I just wait a week or two (maybe more if it’s a really expensive purchase) to figure out if I REALLY want it or just need it in the moment. Throwing this in there will a little more logic to the mix.

    1. Matt January 17, 2013 at 5:21 PM

      Yeah, spending amounts that seem fairly modest like a few hundred bucks a month turn into thousands of lost dollars with this logic.

      It goes the other way too. If a person can make an extra few hundred bucks a month and save/invest it, then the 10 rule applies there as well.

      1. Fig (Figuring Money Out) January 17, 2013 at 8:11 PM

        Rent is a big one. I hadn’t thought about it when I moved recently but I’m so glad I chose a place with less expensive rent. In this case the 10 rule is working in my favor. :)

        1. J. Money January 18, 2013 at 10:00 AM

          yeah! You saved tons more zeros! Haha… you’re rich now! :)

  16. The Happy Homeowner January 17, 2013 at 2:24 PM

    Yikes…I shudder to think about past purchases if that extra zero was added on…definitely going to employ this habit/tool moving forward!

  17. AF66 January 17, 2013 at 4:16 PM

    Looks like i will have to stop drinking Starbucks.. $40/cup is outrageous!

    1. J. Money January 18, 2013 at 10:02 AM

      Haha… I bet people would still pay at that rate though :) Some of us are ADDICTED!

    2. Matt January 20, 2013 at 6:38 PM

      Usually for small and repeated purchases, I do a back-of-the-envelope calculation on my annual costs casually in my head once in a while as a sanity check.

      Like if I buy a $2 coffee each work day for around 250 days per year (50 weeks and 5 days a week), then my morning coffee annual expense would be $500. So I ask myself, “Am I cool with spending $500/year on coffee or should I change my habit here?”

      The same at $4/coffee would be $1,000/year in coffee expense. If one wants to take the calculation further, they can estimate their disposable income. Like, if a person has $10k in disposable income and spends $1k/year on coffee, then they’re spending 10% of their total disposable income on coffee. But if it’s $30k, then they’re only spending 3.33% on coffee.

      There’s a popular blogger out there that would regularly make fun of trying to save money on coffee. I’d agree to an extent: fretting over each and every coffee purchase would be a bit extreme. However, doing an occasional annual expense calculation of any regular/repeated activities you do can help determine whether there are any habits worth changing or not. Fretting over small purchases would be small wins, but deciding to permanently change a habit or not would be a big win. It has to be subjectively decided whether the reward is worth the cost, which depends on each person’s preferences.

      Personally, I drink quite a large amount of green tea each day and I enjoy that expense.

      1. J. Money January 21, 2013 at 4:23 PM

        Haha, I believe you may be referring to Ramit from IWillTeachYouToBeRich :) Which I actually love – the whole “spend your money on whatever it is that excites you.” You just need to prioritize and then cut out costs in areas you don’t care about at all…. So for people like me who don’t mind spending $4 on a cup of coffee every single day (or 10!), as long as we’re not doing that in all areas across the board we’re fine. I remember he mentioned a guy who spent thousands of dollars on mountain bikes cuz he loved to race a lot, and in return he lived in a tiny ass place cuz his home wasn’t as important. So to many he was “stupid” for spending so much on bikes like that, but the reality was he was consciously spending wisely based on his priorities. I’ve always liked that example.

  18. debtgirl January 17, 2013 at 5:49 PM

    I REALLY like this tip! I like it Ten Times better than anyone! I Love it! ;-)

    1. J. Money January 18, 2013 at 10:02 AM

      Yeah, very cool!! I love it how all my posts that have made it there have never been MY OWN, haha… but all good things nonetheless – it was a damn good traffic day yesterday :)

  19. Fig (Figuring Money Out) January 17, 2013 at 8:09 PM

    Great post! I’ve never heard of the ten rule but it’s actually pretty brilliant.

  20. Emily January 18, 2013 at 3:29 PM

    Wow, I have a lot to learn! Adding a zero to every price scared the crap out of me. I’m new at this but desperately need it in my life, any tips for beginners?

    1. J. Money January 21, 2013 at 4:25 PM

      maybe start multiplying at 5? haha… I always advise people to just stop and track all money in and out for 3 months which will REALLY be eye opening to them. And consequently (hopefully) will get them to change their habits more… Or at least KNOW what they’re spending/saving now rather than guessing in their heads – that was one thing I learned super fast when paying attention to my money… I was losing like $300 a month when I thought I was SAVING $300-$500 a mo! Pretty dumb of me.

  21. Mike Victor January 19, 2013 at 10:16 AM

    I like the idea of adjusting the price of something you buy to reflect the compounded opportunity cost but all expenses should not be adjusted equally. A 5 dollar cup of coffee at Starbucks is far more expensive than a 1000 dollar flat screen TV for at least 2 reasons. If you buy 1 television every 10 years and enjoy it for several thousand hours the cost per hour is far less than 1 dollar. If you buy 1 cup of coffee every day and drink each cup in 20 minutes, the 10 year cost of that cup of coffee will be over 15,000 dollars and it will cost you $20 per hour in enjoyment. Using similar logic we should be willing to spend far more on a book than a movie and far more on a DVD we might watch repeatedly than on a movie ticket. This method seems simpler and requires no assumptions about inflation or stock market returns. It also makes many big ticket purchases easier since you need not sweat the price differences over different models of washing machines for example if you are only going to buy one a decade if that. Even price differences in the hundreds of dollars approach zero per day of use – just buy the model that is right for you. The same is not as true for computers since I find they are wasting assets that need replacing far more frequently than I anticipate so spending half as much for last year’s floor model or open box special that does 95% of what the Latest and Greatest promises will save you thousands over the years.

    1. J. Money January 21, 2013 at 4:26 PM

      Hah! I like the way your brain thinks :)

  22. Jessica O. January 25, 2013 at 10:38 PM

    I was just talking about this with an attorney today. My husband was ran over by a car last week while stopped at an intersection on his bike. {Driver was texting} He will be out of work for 6-9 months. Not only will he have lost wages, but what about the money he is not putting into his retirement accounts? Missing that 10% contribution is going to cost us much more than the actual contribution amount.

    PS: husband is okay. The driver had no assets and minimal coverage. We are in for a bumpy ride.

  23. J. Money January 26, 2013 at 8:15 AM

    Oh jeez!! So scary :( But yes – soooooo good he’s going to be okay for sure! That’s always most important. Makes you stop and appreciate life a little more too, eh?

  24. lana March 19, 2013 at 3:40 AM

    I sometimes think in terms of how many hours my son would have to work in order to pay for the pile of clothes I’m buying for him, or how much the driving school costs. He earns $10 an hour, so it’s easy to see how many hours he would need to work in order to pay for items. Sometimes I point it out. My kids are pretty frugal, at least with their own money.

    God willing, there will come a time when my kids can pay for all their own expenses.

  25. J. Money March 19, 2013 at 9:58 PM

    Hah! Love it. They’ll get there some time :) And then it’ll take another 10 years after that for them to realize how good they had it with you! Haha…

  26. Stefanie November 22, 2013 at 1:50 PM

    I like the concept of the 10 rule, but I feel that in practice, nothing would be worth it. I tend to think about expenses in the amount of work hours it would take for me to afford them.

    1. J. Money November 26, 2013 at 1:27 PM

      I like that way of thinking about it too :)