Pound Wise and Penny Foolish

[Today’s Thursday re-run first appeared September 1, 2009.]

A few days ago there was an encouraging little post on The Wallet about how we’re spending more on life’s smaller luxuries in the face of the Great Recession. I call it encouraging because I think it is the direction most people should go in their spending, more on the small stuff, less on the big things, Mansion - William Helsen and I like reading positive articles about how consumers are doing this. Not that I really think this is going on.

My theory, admittedly not based on much science, is that we’re happier if we spend more on the smaller things we like than on the big things. A great big house may indeed add joy to our lives, but not as much as the equivalent in nights out on the town. (Or rounds of golf, or manicures or whatever floats your boat.)

Happiness is obviously completely subjective and unquantifiable. Which is why it is so hard for us to think analytically about how to spend our money to maximize it. The $750 car payment for that new set of wheels seems like a good idea. We think that we will enjoy driving it. And we are probably right about that. But the question to ask is not whether or not the car will be enjoyable but whether or not it will be as enjoyable as other possible uses for $750 a month. And that’s really a hard question to answer.

In many ways this is the flip side of The Latte Thing. There are people who enjoy depriving themselves of small daily luxuries because it makes them feel like they are virtuously saving money. But the money saved is unlikely to be significant. What they’ve managed to do is save in a noticeable way that frequently reminds them how good they are being. It is as if they are keeping score not in dollars but in acts of frugality.

The same dynamic in reverse implies that spending on little things makes sense. You notice them. The same reasoning that concludes that cutting out the $5 a day on coffee isn’t going to make much of an impact on your wealth tells you that the $5 is a cost-effective route to happiness.

So reacting to the Great Recession by cutting back on big-ticket items like vacations to Tahiti and spending more on things like eating out would be, in my view, a welcome development. That’s the gist of the post at The Wallet, which bases this on data from "Sageworks Inc., which aggregates data on private companies."

The first two items on their list of "basic luxuries" that have seen sales growth in the past year don’t sound particularly luxurious to me: on-line shopping and gym membership. Maybe that’s just me. The next three sound more likely: drinking in bars, sports and hobbies, and dining out. They are each, we are told, up between 3% and 6%.

That’s interesting. Most of the articles we see these days about the "new normal" say the opposite, that we are cutting back on such things. And sales for The Cheesecake Factory, PF Chang’s, Brinker Int’l, California Pizza Kitchen, Footlocker, Nike, and, of course, Starbucks have all been flat to down lately. Then again, business at McDonalds has been off too. There’s a recession on, you know.

So the proposition that Americans are now spending more on smaller luxuries is one of many that I am skeptical about. But it would be nice.

[Photo: William Helsen]

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