The 2x Rule and maximizing fulfillment
ONE OF MY best friends was studying abroad in South America when he told me about one of his fellow classmates, James (not his real name), who had no concept of prices. I was initially confused by my friend’s statement. “What do you mean he has no concept of prices?” I asked. My friend went on to explain:
“When you sit down at a restaurant and open the menu you probably notice two things. First, you see what food items the restaurant has to offer. But, second, you also notice the price of these items. Maybe the difference in price between one entrée and another won’t affect your final decision on what to eat, but at least you acknowledge that there is a price.
The simplest way to know whether you acknowledge prices is to imagine how you might feel if you sat down at a restaurant where the menu had no prices.”
My friend then went on to explain that his classmate James had no such notions. But, what James did have was his father’s credit card.
Dinner? James covered it. Club admission? On James. Bottle service? James’s treat. One time James even offered to charter a helicopter via his satellite phone to rescue everyone after they got lost while on an overnight hike to Machu Picchu. Thankfully, others in the group convinced James otherwise before reorienting themselves and finishing the hike unscathed.
James is an example of someone who had no guilt when it came to spending money. However, I’ve seen the other end of the spending spectrum as well.
I once had a coworker in San Francisco named Dennis (not his real name) who took frugality a bit too far. One thing Dennis used to do to save money was game the Uber app to try and avoid its dreaded surge pricing.
For those that don’t remember, in the early days of Uber you weren’t quoted a price for your ride, but a surge indicator of how much your ride would be expected to cost. So a 2x surge meant the fare was twice as high as it normally would be, and so forth. One of the other things that Uber used to do was require you to drop a pin of your location in the app. This pin told your driver where you were, but it also determined the surge price.
Dennis somehow figured out a glitch in the app where you could drop your pin into a low surge area, lock in the price, then move it back to your actual location for your driver to pick you up. Dennis showed us how he would drop his pin into the middle of the San Francisco Bay (where there was never a surge) before moving his pin back to his location and saving $5–$10 per ride.
I still have no clue how he figured out this early glitch in their system, but I warned him that Uber would fix it. Surely enough, they did.
On New Year’s Eve 2015 Dennis tried the “Uber pin trick” while trying to get a ride home drunk at 2AM. The surge pricing indicated 8.9x the normal fare and he didn’t want to pay it. Well, the trick failed.
The next day he got the bill for $264. I only know this because he eventually told the whole office how “Uber ripped him off” after he spent weeks fighting the charge. I don’t think I’ve ever felt more happiness at someone else’s misery in my life.
James and Dennis illustrate the extremes people can go to when it comes to spending money. Unfortunately, neither of these approaches is ideal. While James spent his money guilt-free, he did so frivolously. And while Dennis managed his money well, anytime he did spend it he was filled with anxiety.
Unfortunately, most of the personal finance community tends to side with Dennis over James. Whether they emphasize reducing your expenses or growing your income, their approach is typically based around one thing—guilt.
Between Suzie Orman telling you that buying coffee is equivalent to “peeing away $1 million” and Gary Vaynerchuk asking you whether you are working hard enough, mainstream financial advice is built upon sowing doubt around your decision-making.23
Should you buy that car?
How about those fancy clothes?
What about a daily latte?
Guilt. Guilt. Guilt.
This kind of advice forces you to constantly second-guess yourself and creates anxiety around spending money. And having more money doesn’t easily solve this problem either.
A 2017 survey by Spectrem Group found that 20% of investors worth between $5 million and $25 million were concerned about having enough money to make it through retirement.24
This is no way to live your life. Yes, money is important, but it shouldn’t alarm you every time you see a price tag. If you have ever debated whether you could afford something even when you had sufficient funds, then the problem isn’t you, but the framework that you are using to think about your spending.
What you need is a new way of thinking about how to spend money so that you can make financial decisions without worry. To do this, I recommend two different tips that, when combined, will allow you to spend your money 100% guilt-free. These are:
1. The 2x Rule
2. Focus on Maximizing Fulfillment
1. The 2x Rule
The first tip is what I call The 2x Rule. The 2x Rule works like this: Anytime I want to splurge on something, I have to take the same amount of money and invest it as well.
So, if I wanted to buy a $400 pair of dress shoes, I would also have to buy $400 worth of stocks (or other income-producing assets). This makes me re-evaluate how much I really want something because if I am not willing to save 2x for it, then I don’t buy it.
I like this rule because it removes the psychological guilt associated with binge purchases. Since I know that my splurging will be accompanied by an equal-sized investment in income-producing assets, I never worry about whether I am spending too much.
How big does a purchase have to be for it to be considered a “splurge”?
This will vary from person to person and over time, but whatever feels like a splurge to you, for all practical purposes, is one. For example, when I was 22 years old (and had far less wealth), spending $100 on a non-essential item was a splurge for me. Today it’s probably closer to $400.
However, the exact amount is irrelevant. All that matters is the feeling that you get when you consider buying something. Whether you are spending $10 or $10,000, you can use The 2x Rule to overcome that feeling of guilt and enjoy your wealth.
More importantly, you don’t have to invest your excess savings for The 2x Rule to work effectively. For example, if you buy something worth $200, you could donate $200 to a charity and have the same guilt-free effect.
Every extravagant dollar you spend on yourself could be matched with a charity dollar that goes to a worthy cause. Not only does this allow you to help others, but you won’t feel bad when you spoil yourself.
No matter how you decide to use The 2x Rule, this is one simple tip that can help free you from the prison of purchase guilt.
2. Focus on Maximizing Fulfillment
The second tip I use to spend my money worry-free is to focus on maximizing my long-term fulfillment. Note that I said fulfillment and not happiness. The difference is important.
For example, running a marathon is probably a fulfilling experience, though it may not necessarily be a happy one. The exertion and effort required to complete a marathon does not typically create a sense of moment-to-moment happiness, but it can create a deep sense of accomplishment and fulfillment once the event is over.
This is not to say that happiness doesn’t matter. Of course it does. The authors of Happy Money: The Science of Happier Spending found that spending money in the following ways was most likely to increase your overall happiness:25
· Buying experiences
· Treating yourself (on occasion)
· Buying extra time
· Paying upfront (e.g., all-inclusive vacations)
· Spending on others
These are all areas where having (and spending) more money generally means more happiness.
However, even these great tips are no panacea. You can buy the absolute best experiences and allow yourself all the free time in the world, but this does not guarantee that you will be fulfilled.
So, what can increase fulfillment?
This isn’t an easy question to answer. In Drive, Daniel H. Pink proposes a framework for understanding human motivation that provides a great start. Pink discusses how autonomy (being self-directed), mastery (improving your skills), and purpose (connecting to something bigger than yourself) are the key components to human motivation and satisfaction.26
These same categories are also useful filters for deciding how to spend your money. For example, buying a daily latte may seem unnecessary, unless that latte allows you to perform at your best while at work.
In this instance, the daily latte is enhancing your occupational mastery and represents money well spent. You can use the same logic to justify purchases that would increase your autonomy or sense of purpose as well.
Ultimately, your money should be used as a tool to create the life that you want. That’s the point. Therefore, the difficulty lies not in spending your money, but figuring out what you truly want out of life.
What kind of things do you care about?
What scenarios would you prefer to avoid?
What values do you want to promote in the world?
Once you figure that out, spending your money becomes easier and much more enjoyable. The key is to focus on the framing of the purchase rather than the purchase itself.
After all, it’s not the purchase that makes you feel guilty, but how you justify that purchase in your head. And if you don’t have a good reason to buy something, then you will probably feel bad about it later. You can lie to yourself all you want, but deep down you know the truth.
The easiest way to combat this is to ask yourself whether a given purchase will contribute to your long-term fulfillment. If the answer is “Yes,” then make the purchase and stop beating yourself up mentally. But if the answer is “No,” then you need to move on because there are other areas where your money would be better spent.
The Only Right Way to Spend Money
The only right way to spend money is the way that works for you. I know this sounds cliché, but it’s backed by data as well.
Researchers at the University of Cambridge found that individuals who made purchases that better fit their psychological profile reported higher levels of life satisfaction than those who didn’t. Additionally, this effect was stronger than the effect of an individual’s total income on their reported happiness.27
This research suggests that your personality may determine what you enjoy spending money on. If this is true, then some of the common advice around optimal spending may need to be reconsidered.
For example, it has been well documented that people get more happiness buying experiences over material goods.28 However, what if this is only true for a subset of the population (e.g., extroverts)? If so, then we may be generating spending advice based on the 60%–75% of people who are extroverts to the dismay of introverts around the world.
This is why you have to go beyond the research to find what works best for you when it comes to spending money. The science of spending can only get so precise when it comes to predicting what will make someone happier.
Ultimately, you are the one that must figure out what you want out of life. Once you do, then spend your money accordingly. Otherwise you might end up living someone else’s dream rather than your own.
Now that we have discussed some tips on spending your money guilt-free, let’s move on to discuss the right way to spend a raise.
23 Martin, Emmie, “Suze Orman: If You Waste Money on Coffee, It’s like ‘Peeing $1 Million down the Drain’,” CNBC (March 28, 2019).
24 Rigby, Rhymer, “We All Have Worries but Those of the Rich Are Somehow Different,” Financial Times (February 26, 2019).
25 Dunn, Elizabeth, and Michael I. Norton, Happy Money: The Science of Happier Spending (New York, NY: Simon & Schuster Paperbacks, 2014).
26 Pink, Daniel H, Drive: The Surprising Truth about What Motivates Us (New York, NY: Riverhead Books, 2011).
27 Matz, Sandra C., Joe J. Gladstone, and David Stillwell, “Money Buys Happiness When Spending Fits Our Personality," Psychological Science 27:5 (2016), 715–725.
28 Dunn, Elizabeth W., Daniel T. Gilbert, and Timothy D. Wilson, “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right,” Journal of Consumer Psychology 21:2 (2011), 115–125.