If you know me, you know there’s nothing I love more than a little indulgence. I work hard so I can have nice things on the daily. I can justify my Starbucks on the way home after a bad day, getting an impromptu manicure after a great day (to keep the good vibes going), and picking up a nice bottle of wine just because it’s Wednesday. I’m a gal who loves to treat herself and will take any excuse I can get.
It turns out, I’m not the only one. “Treat yourself” has quickly become the anthem of many, with the hashtag on TikTok currently sitting at 2.8 billion views. That’s a lot of treats, even by my standard. That also means a lot of dollars spent on these little indulgences. @MoneywithKatie recently shared a post on Instagram that stopped me in my tracks and made me consider just how much my “little treats” might be impacting my savings goals. In her post, she shows how a marginal increase in savings rate (say, going from saving 10% of your income to 12% or 15%) can get you years closer to your long-term goals, like buying a house or retiring. Wow, talk about eye-opening.
Her post didn’t stop there, though. It showed that at high saving rates, tightening your belt to save even more doesn’t have as much of a dramatic impact, meaning there’s probably a sweet spot where we can maximize both long-term goals and little treats (my husband will be hearing about this logic later). Let’s take some time to dig deeper into this idea so we can get to the bottom of things, treats intact.
How “Little Treats” Affect Your Savings Goals
Small costs add up over time
As we all know a bit too well, little costs (sadly) add up over time and can significantly impact your goals—a fact many financial experts have shared before. It’s where the “latte factor” idea comes from: skip the lattes (and other treats) so you can save your money and buy a house, retire, or achieve whatever goals you’re working towards sooner. While the idea of avoiding small expenses might seem logical enough, it can be hard to remember in the moment, especially if you have the “treat yo’ self” mentality (guilty). That daily $5 for coffee and $30 for drinks with friends a few times a week can quickly add up to hundreds of dollars a month that you don’t notice that you’re spending. That’s money that, if put in a high-yield savings account or invested (depending on your timeline), would get you significantly closer to your goals.
That being said, who wants to be the person who never goes out to eat or makes a spontaneous lipstick purchase at Sephora? Nobody, but it can be hard to know when to prioritize saving for the future at the expense of today’s happiness. At this point, we’re tapping into the concept of delayed gratification. It seems obvious, but the more you save (or rather, invest) now, especially with time on your side, the more you’ll be set up for success later (yay for compound interest!). With that logic, you could cut out ALL unnecessary expenses and get to your goal faster: Katie’s post has a great chart that shows how saving 40% of your income versus 10% will allow you to retire in almost half the time. However, cutting out all fun things in the name of saving for the future is just not sustainable for most people. So, is there a happy medium? Enter: the magic of diminishing returns.
Diminishing returns mean you don’t have to quit “little treats” cold turkey
Diminishing returns is the general idea that after reaching a certain point, increasingly doing the same thing won’t generate the same outcome. It can be applied to many things, like going to the gym, watering a plant, and in this case, finances. For easy math, let’s say you’re currently saving 10% of your pre-tax $100,000 salary, which is $10,000 per year. If you decide to evaluate your non-essential spending and cut a few things out (more on that below!), you could increase your savings rate to 20% and end up hitting your retirement number about seven years earlier, which is substantial. That’s because the more money you invest up front, the longer it can stay in the market and earn compound interest. As a note, this assumes a few key things, mainly that you’re receiving marginal increases in income each year (usually through raises), you put your savings in the stock market earning typical returns, and inflation and tax rates stay historically consistent each year.
However, the savings–returns relationship isn’t linear, which is where we reach the point of diminishing returns. If you’re starting from an already fairly high savings rate, increasing it doesn’t have as big of an impact because you’re already benefiting from substantial compound interest. This time, let’s say you’re saving 45% of your income (which is a lot, go you!) and then you decide to cut out the haircuts and manicures you love to reach a 50% savings rate. Unlike the 10% to 20% example above, this time that increase in savings only shaves two years off your goal timeline. It’s up to you of course, but I’d rather keep my haircuts and manicures.
The key takeaway: If you’re prioritizing a lot of “treat” purchases right now at the expense of saving, it might make sense to evaluate your spending to see where you can cut back and give your money more time to generate compound interest. If you’re already saving a good amount of your income, cutting out even more things may not be worth it.
How To Have the Best of Both Worlds
Once you’ve figured out where you fit in terms of a savings and spending rate that works for you, there are some tips you can implement to ensure you stay on track.
Spend mindfully
I will be the first to admit that I won’t be giving up my little treats anytime soon. However, not all indulgences are the same. For me, I don’t find a ton of value in store-bought coffee, so it’s not a line item in my spending budget. I do, however, love to get beauty treatments like manicures and pedicures, so the majority of my treat budget goes towards those things. By being intentional, you’ll easily know where to cut back and save money. Spend some time thinking about what truly makes you happy, whether it’s convenience, day trips out of your city, nice restaurants, etc., and then slowly cut back on everything else that doesn’t bring you as much enjoyment. Treating yourself should be occasionally applied to a few key categories, not every area (or every day!) of your life.
Use a budgeting app or spreadsheet
Is it possible to have a finance article that doesn’t mention budgeting? I know it’s nobody’s favorite topic, but keeping an eye on where you want your money to go and where it’s actually going is important. For a long time I had allocated $400 a month to “fun” money, aka what I would use to treat myself. However, when I’d do my bi-weekly budget check in, I often found I was going WAY over my treat budget because I just wasn’t keeping track of all the little purchases each week and they added up, fast. I started using a budgeting app and it made a huge difference, allowing me to see how much I was spending as I went. If you find yourself always wondering where your money is going, give this tip a try.
Set up automatic transfers
Once you’ve done the heavy lifting of figuring out how much you want to save, the best way to actually make it happen is to set up automatic transfers so the money is moved out of your account and put into savings or invested without even thinking about it. A common pitfall of saving money is waiting until the end of the week or month to move your savings, which often means you aren’t actually saving what you thought you would be because random expenses come up (ahem, see the tip above). If you want to save 20% of your income, determine what that is per paycheck and set up automatic transfers to take it out right when you get paid. Then you’re left to spend only the remaining amount.
Revisit your treat habits regularly
Life is truly like a box of chocolates in that you never know what you’re going to get. There will be times in life when you need to allocate more to your “treat” budget (maybe you recently experienced a breakup or job loss and just need more pick-me-ups), and there may also be times where certain treats aren’t bringing you the same level of joy they once were and that money would be better put towards savings. By regularly revisiting what you’re spending money on and whether you’re actually enjoying it, you’ll find opportunities to revamp your spending so it works for you now and in the future.
The Bottom Line
At the end of the day, savings are important, but living life is equally important. Otherwise, what are you saving for? Some people might find a lot of happiness in putting away 50% of their income to reach a financial goal quicker and have no problem forgoing impromptu flowers, post-workout smoothies, and impulse clothing purchases to get there. However, as the research shows, that approach isn’t the only way to achieve your goals. Treating yourself and budgeting for intentional, fun purchases can help you stick with your goals without burning out, and ensures that you’re looking out for your future self as well. Does that call for a happy hour celebratory drink? I think so.
