FUNDAMENTALS OF FINANCE
A Guide for Helping Professionals
Adam J. McKee
SECTION 2.5: Living the Good Life
This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.
By this point, it should be clear that people often do things that are not in their best financial interests. You only need to refer back to the horrendous amount of consumer debt that Americans have to confirm this fact. When you look for the “sense” in this conspicuous spending behavior, you will always come up short. The reason for this is simple: The behavior makes no sense because it is not rational. You simply cannot rationalize paying $5000 for a wristwatch when you can get an excellent timepiece for less than $50.
Part of the explanation for this is brand loyalty. Some people will always buy certain brands because they regard them as superior, and the value underlying the purchase is seldom considered in an objective way. This sort of thinking involves a psychological bias where we extol the virtues and fail to consider the disadvantages of the product. The takeaway is to always search for authentic value across the full spectrum of product offerings. In an age of crowdsourced reviews on nearly every retailer’s website, there is no reason to compare and contrast the competition to determine which product offers the best value. Amazon even provides you with a handy table to compare similar products. Buying a particular brand because of brand loyalty makes no sense in today’s information-driven economy.
Often, people develop a mindset that luxury goods are superior, and non-luxury goods are inferior by their very nature. This thinking colors our perceptions of reality. When an economy car needs to be put into the shop, we rail on it, calling it a cheap piece of junk. When a luxury car needs similar repairs, we say that it is suffering from inevitable wear and tear and is in need of a little TLC.
Why do people often buy luxury items that they cannot really afford? The answer, according to social psychologists, is self-esteem. The theory states that those with low self-esteem coupled with poor personal finance skills are likely to buy “high-end” goods as a status symbol. This makes them feel better and can provide a sense of belonging to a higher social stratum. The human need for esteem and a sense of belonging is a very powerful driver of irrational actions. These drives often occur in the arena of personal finance.
One only need read The Millionaire Next Door to see how the average (majority) of millionaires really spend their money; they do it frugally, and generally, view luxury goods as pretentious wastes of money. In reality, most people who spend heavily on luxury goods are posers. It is important to note that these posers don’t understand that they are posers. When they go off in search of the latest status symbol, they are looking for the genuine article. A fake Rolex purchased from a street vendor will not do; they are looking for an authentic luxury good.
Vacations and Travel
Vacations and travel can be very rewarding, but they often come at a premium cost. A quick way to save money in the short term is to reduce or eliminate vacations and travel for a period of time. “Staycations” have become a popular alternative to travel. If you really want to travel but need to do it cheaply, consider visiting friends or relatives you haven’t seen for a while. This can be enjoyable, and staying with them rather than in an expensive hotel can save you a lot of money. Merely choosing a vacation destination that is within driving distance can potentially save you hundreds on airfare.
If you are traveling with a large family, logistics and cost can be extremely important. Going on a 7-day cruise with a family of five can be lavishly expensive. Booking a ‘short stay apartment’ at a beach location can be a cost-effective alternative.
For most people, especially those of us in the helping professions, money is a finite resource. We must make choices, and often those choices are driven by the need for status, and the drive to achieve a “cool factor” in our lives. Before making any major purchase, you should ask yourself, “Why do I want this?” I can’t tell you that buying a $10,000 watch is stupid; I have no way to know how much joy that item will bring to your life. I have found in my personal life, however, that those material things that cost a lot of money quickly become regrettable purchases. The secret is to determine value; value can have many meanings when it comes to consumer spending. One important one is that your purchase withstands the test of time; an “awesome” item may not be so awesome a year down the road, and you may wish that you hadn’t blown all that money on it.
It is also important to remember that we reside in a consumer culture that is carefully designed to make America’s corporations wealthy, and this is done by separating you from your hard-earned money. When something is “hot this year,” you will likely be much better off spending your money on the stock of the company that makes the product than buying the product. Always keep in mind that the average American is in a never-ending spiral of consumerism fueled debt that they will never escape. They will never be wealthy. To achieve wealth, one must stop the merry go round and get off.