Saving vs. spending: When to splurge

I'm 39, self-employed and make $200,000 a year. I have no mortgage and have saved $1.2 million, 75% of which is in retirement accounts. I'd like to relax and live it up a bit, but I'm afraid that the good days might end.

My question: Can I finally drop $40,000 on a used BMW and $50,000 on a kitchen remodeling? Or should I put that $90,000 toward my two kids' future college expenses, which are roughly a decade way? -- B.A., Harrisburg, Penn.

Being prudent doesn't mean you must live as if the bottom is going to fall out of your finances at any moment.

Ideally, you want to achieve a balance between saving and spending that allows you to enjoy life today without pampering yourself so much that you shirk your responsibilities for the future. From what you've told me, I'd say you're a long way from overindulging.

Of course, the mere mention of a $40,000 BMW will have some people accusing you of conspicuous consumption and worse. And you could easily find a car with a lower price. Relative to income, though, you paying $40,000 is roughly the equivalent of someone with the median household income paying about ten grand for a car, an amount that wouldn't raise an eyebrow.

As for the kitchen upgrade, $50,000 is a considerable sum. But your budget is actually less than the nearly $58,000 "Remodeling" magazine's latest cost vs. value survey found was the average cost of a kitchen renovation. By the way, the magazine also estimates you would recoup almost 70% of that cost at resale.

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Given all this, you don't need to worry that you would be acting irresponsibly by refurbishing your kitchen and buying a nice used car you've had your eye on.

So I say go for it, on the condition that you do the following two things: first, continue to save for retirement via tax-advantaged plans for the self-employed or other retirement savings vehicles; second, set aside enough in a 529 plan or other college savings account over the next 10 years to pay for a decent chunk of your kids' education.

Considering that you're mortgage free, you should have plenty of disposable income for saving. You've also got a good head start on the retirement front, which should make it possible for you to save for retirement and education at the same time (although if push comes to shove, favor retirement first).

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Saving vs. spending: When to splurge