PART OF THE 2022 FINANCIAL FUNDAMENTALS SERIES
Editor’s Note: We are in the midst of a dozen year bull market in the US, creating an environment in which fundamentals are less in focus. This series of posts explores the less complex tactics of the personal finance playbook.
When I landed my first job, I rewarded myself with a Louis Vuitton scarf.1 Once you are done laughing or rolling your eyes; let’s explore why I bought this expensive scarf.
First and foremost, it was because that’s what Kayne West and his collaborators were rapping about in 2008. After landing this entry-level job, I guess I thought I was now a peer. More simply, and in all sincerity, I thought it was a symbol of a culture I wanted to be a part of in that moment. Secondly, and even more simply, it made me feel good. If only for a moment.
One of the go-to clickbate investing articles is the ole, “If you had invested $X dollar in ABC Company over Y time period, you would have $Z dollars!!!” So I have to do it…
If only I had bought shares in a fledgling mail order DVD service instead of the scarf.
But the focus here isn’t investing. It’s spending.
I’d been workshopping this piece through the “Black Friday” and “Cyber Monday” season of 2021, which was a reminder of how easy it is to spend money nowadays. Targeted ads in our face, further facilitated by things like Shop Pay or Apple Pay which have made purchases so frictionless. Just as Amazon envisioned a decade ago, you can now purchase something via literally just a click or two on a larger and larger swath of the internet.
🔸🔸🔸
There is so much fun stuff for us to spend our money. There’s no better term than “stuff” really. I use that generic term intentionally. It’s just things. Obscure utensils for your kitchen, trinkets for your bathroom, that thing for your car, and stuff for your yard. Not to mention your dog! He’s got to have that $70 Yeti bowl! It goes on and on.
Why do we buy this junk stuff?
Part of the answer may be dopamine. But research is showing this chemical response is a bit different than we used to assume. Dopamine is described as the “chemical of pleasure”. The revised opinion in the scientific community is that dopamine is specifically connected to motivational salience. In other words, dopamine is released in anticipation of a reward.
Shopping can release dopamine. But if dopamine is more present in the moments of anticipation, that means online shopping is particularly dangerous — you get the extended anticipation while you continuously surf and scroll.
🔸🔸🔸
When your income is greater than your expenses, there is the desirable problem of deciding what to do with that discretionary income. As income increases (via a pay raise at your current job or starting a new job for example) it can be difficult to not put those incremental dollars towards less than necessary purchases, a.k.a. luxuries.
In the monster hit, Sapiens, Yuval Noah Harari talks about the concept of luxuries…
One of history’s fews iron laws is that luxuries tend to become necessities and spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it.
That’s lifestyle creep!
No, Harari doesn’t explicitly use the term. However, luxuries becoming necessities is precisely what “lifestyle creep” refers to.
This blurb from Harari also alludes to why lifestyle creep is dangerous. These things are hard to unwind.
🔸🔸🔸
My mother used to say to me, “It’s not what you make, it’s what you spend.” While that may be an oversimplification, there’s a lot of wisdom in this.
That way of thinking may have colored my view on many things tied to finances. I remember hearing a colleague talk about having a cleaning service come to their house once a week to clean. I didn’t show it, but I was surprised if not shocked.
Some quick internet research tells me that if I want weekly maid service where I currently live, it will cost approximately $5,800 per year.
The rationale for a cleaning service is pretty sound — (a) it makes your life better because no one likes cleaning and (b) it frees you up to do more productive things so it could create a positive return on that outlay of money.
Once you’ve upgraded to that cleaning service it’s hard-to-impossible to go back. That’s just one example but it’s universally applicable. It’s really hard to put this genie back in the bottle.
Everyone has a different equation when it comes to analyzing the cost versus the benefit provided, such as the convenience of a cleaning service. And, making things more difficult, this equation is an ever moving target as life events happen.