Dear Mr. Money Mustache, I just came across your blog a few weeks ago after seeing a story about it on ABC. While the idea of cutting back my lifestyle sounded horrible at first, once I dug in I saw what you were really talking about and it has been like a giant boxing glove hit me in the face. Until recently I thought we were doing pretty well. But suddenly I could see money leaking out everywhere in our lifestyle: the cable package, remaining student loans, restaurants, excessive driving, excessive air conditioning – everywhere. My question is what to do about the decisions that are already “locked-in”. We have some expensive and not-that efficient cars (A 2010 Mazda CX-9 and 2013 Acura TL), but at least they are paid off so we might as well drive them forever, right? Also, we live about 15 miles from work in a house that is way too big for the four of us, but on the bright side we bought it in on foreclosure in 2009 and the value is up about $100,000 since then. Finally, and I have an old (2000) speed boat and a camp trailer we use occasionally in the summers – these are paid off as well, but they do cost something to store and maintain (about $2400/year). We’ve started biking more and doing more local activities and the kids like it. I just wish we hadn’t locked in these earlier poor decisions.

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First of all, let me admit that the above person is somewhat fabricated. I find letters like this waiting for me every morning when I wake up, and so many of them follow the same general pattern that I figured we could create a great lesson by combining some of the best details into one composite letter. And that lesson is the one right there in the title:

Don’t let the boat anchor of your past mistakes drag on you forever into your future.

Clinging to past behaviors is one of the built-in weaknesses (also known as Cognitive Biases) that we humans are born with. In this case, we’re talking about Loss Aversion and maybe a bit of the Sunk Cost Effect: we tend to value things we already have, and things we have poured a lot of money into, even if they are in fact pieces of crap when measured on an objective quality-of-life scale.

“I’d hate to take the depreciation hit on this 2012 Dodge Ram 1500 BigHorn after making three years of payments on it!”

These prepackaged flaws are so powerful that we need to pull ourselves deliberately in the other direction in order to end up at a reasonable middle ground. Even when you think you’re living life in a reasonable fashion, this bias will still sneak up and bite you.

And it still bites me too – let’s look at another example from my own life right now. Do you remember that rental house I was so happy to have sold in the last article?

On paper, it looks pretty good: I was stuck with a supposed-to-be-$650,000 house back in 2010 that I was having trouble selling even with the listing price dropped down to $480k. Probably because the market value was more like 450. At the time, I felt stubborn and defiant:

“There’s no way I’m selling this prized bit of my work for $200,000 less than it is worth! I’ll just rent it out, collect some income, and ride the prices right back up. Then, justice will be served and my past mistakes won’t look so bad.”

However, and this is the key to this whole article, if the situation were reversed I would have given a completely different answer. Suppose it was the year 2010 in a different universe, and I was not saddled with that house. I was retired, had that same $450,000 sitting happily in index funds, and looking out at the carnage in the housing market. If someone had suggested I invest in this house, it would be a different conversation:

Random Person: “Hey man, do you want to buy a $450,000 house in a high-end neighborhood with a strict Homeowner’s Association? It’ll give you $2400 in rent, plus whatever appreciation the housing market provides. Property taxes will run you around $3200/year and the HOA fees are another $960. And don’t forget maintenance!” Me: “Are you Effing Crazy!? I’m retired! I don’t need some fussy high-end rental. I’ll sit back and enjoy my index funds, or at least get something like a 4-plex that nets $4000/month for that kind of money!”

But cognitive bias struck, and I decided to rent out the place anyway.

And sure, things turned out roughly as a reasonable forecast would predict: I put it up for rent, and collected over $144,000 in rental income over the next five years. On top of that, the housing market recovered so the house appreciated by an additional $115,000. A total income of $259,000, which sounds pretty good on a $450,000 investment, right?

But wait. Let’s subtract the taxes and HOA fees at $20,800 over those five years.

Then subtract my maintenance costs, which added to about $10,000 (most of it spent just this past May as I restored the house to its original sparkling condition for sale).

Plus an estimate of the value of my labor for managing and maintaining it: 200 hours at $40, or $8,000.

This yields a net profit of about $220,000, meaning my $450,000 grew to $670,000.

It still sounds like an amazing windfall, but that’s just because $450 grand is a lot of money, and five years is a fair amount of time. On an annualized basis, this is like earning just 8%. Yet another example of how your money can work harder than you can.

What if I had put this money into the plain old conservative Vanguard S&P500 index fund (VFIAX) instead, and allowed all dividend payments to automatically reinvest?

Plugging the dates into our amazing IndexView tool, I can see that a stock investment would have roughly doubled in that time period if you include dividend reinvestment. In other words, if I had ditched that house at $450,000 and just kicked back for the next five years, that chunk of money would be over $900,000 today.

Hindsight is 20/20, as they say. The stock market could easily end up going sideways over a five-year period. But what matters is making the choice that is most likely to be the right thing for you. And that means thinking about today’s big decisions as if there were no past baggage attached to them.

In the introductory story, the brand-new Mustachian is currently burdened with a money-burning 2010 Mazda CX-9 SUV, which would fetch about $12,000 on the used market. If she were starting from scratch with $12,000 in the wallet and no car, would she buy the same vehicle? Or perhaps the far superior 2010 Honda Fit which handles better, will cut the running costs in half, and costs over $3,000 less?

The $3000 cash difference plus a savings of $2500 per year in fuel, depreciation and maintenance will compound to a wealth difference of over $30,000 per decade, just from this one decision. Not many people realize the staggering effects of a poor vehicle choice, which is the reason SUVs exist in the first place. But now that the new knowledge has been acquired, it is time to act on it. Since she wouldn’t buy the SUV right now, she should sell the SUV right now.

Similarly, moving a double-commuting couple 15 miles closer to work will save you close to $100,000 every decade in direct car costs alone, but much more than that if you factor in the value of your own time and health. Most people don’t realize the shockingly high cost of car-commuting. If they did, distant suburbs and the the entire phenomenon of “rush hour” would not even exist. But once you do get the secret memo, it is time to act on it and move.

Lifestyle trinkets like motorboats and rarely-used cabins, ATVs and country club memberhips seem like an harmless treat you indulge in when you get your first promotion at work. But they tend to add up and become a massive tax on your life – draining attention and cashflow to the tune of hundreds of thousands more per decade. Once you realize that these little weekend amusements are equivalent to chaining yourself to an office for an extra 40 years, you might weigh the decision differently. And so you can change your decision. Right now.

But What about Transaction Costs?

The Economists of the audience are probably a bit annoyed right now: “Mustache’s examples don’t account for the time and money you need to spend to change cars, or change houses! Often if you take these into account it would wipe out the first several months of savings or more!”

They are right to a certain extent. But I encourage people to push through the pain and get the deals done anyway, because making transactions is good for you.

Transactions, deals, friendships, and other arrangements with other humans are the highest-paying and often most rewarding thing you can do with your time. Even the ones that don’t go perfectly build your perspective and your Badassity.

Most of us make far too few transactions, and this lack of experience keeps us in fear, so we avoid them even more with each passing year. Your skill and comfort with life transactions is reflected directly in your wealth and the quality of your life.

So even if it does take a few hours to photograph the gas guzzlers and get them onto Craigslist, and even more hours to search out a new ride, make the investment and get the job done. The momentum you gain will start a chain reaction that helps you clean up all your other past mistakes.

What would you do differently if you could go back to age 19 and design your wealthy dream lifestyle from scratch?

How many of these things can you change and improve right now if you really put your mind to it?

I’m looking forward to getting fewer excuses for the past, and more announcements of massive change in the present, in my future emails.