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]

6 Comments

  • By Kosmo @ The Soap Boxers, September 30, 2010 @ 2:19 pm

    “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.”

    Yeah, I’m not following the logic there, either – especially with online shopping.

    In the last few years, I have started buying all my filters online (furnace, humidifier, fridge water line). Why? Because I could never seem to find them in stores and got annoyed driving all over town to find them.

    Online shopping is only a luxury if you’re buying things that you wouldn’t buy in a brick and mortar store – otherwise, it’s just a different way to purchase the exact same items.

    I’d hate to see my rampant filter purchasing habit get tagged as a luxury.

  • By Ivy, September 30, 2010 @ 3:24 pm

    Related both to this post and your last (about financing new versus used cars)… We were just in the market for a second car. We’d been fine with a single car for a number of years, but circumstances changed to require a second vehicle (so truly a need for us). We knew we’d need to finance.

    In researching it felt like we had two options. Either buy a new basic model car for 0% interest, but at close to MSRP or a used luxury car with low interest (5% ish) but with significant depreciation in price. The actual amount of money we’d spend (including total interest paid and a top notch warranty for the used car) would be very close to one another.

    We decided on the used, but much nicer, car. Why? Because we knew the car itself (the large purchase) wouldn’t make us happy beyond the fact that we could get where we needed to go. What would make us happy were the options (the “little things”) — the navigation, the heated seats, the leather, the hybrid engine. The features that make driving the car easier and more comfortable (and in the case of the hybrid, cheaper at the pump). Now, everyone has a different definition of “luxury car” but for us it meant the pristine 3-year-old Toyota Camry with ALL the options (and 75K on it) is a better deal than the brand new Hyundai Accent with maybe a CD player. For about the same money overall (the Camry ended up being a tiny bit cheaper), I think the Camry will give us more happiness with the same basic ability to get from point A to B.

  • By starshard0, September 30, 2010 @ 9:37 pm

    Wouldn’t the best solution to just not spend any money on luxuries at all. I’ll hate my life anyways as long as I have a job, so there’s no reason to try to make it better by buying stuff, even if it’s little stuff.

  • By starshard0, September 30, 2010 @ 9:41 pm

    Holy crap typos, my comment should read: Wouldn’t the best solution be to just not spend any money on luxuries at all? I’ll hate my life anyways as long as I have a job, so there’s no reason to try to make it better by buying stuff, even if it’s little stuff.
    I’ve found that saving money makes me a lot happier than spending it, though I imagine a lot of people are the opposite.

  • By Boston Steve, October 1, 2010 @ 8:58 am

    I really do try to purposely skip on the little things like take out food, coffee out, etc. but then when I really want something whether it’s small, medium or big I have the money for it. I can easily forgo the daily coffee from Dunks, for a nice bottle of Talisker’s…..

  • By Frankie, October 1, 2010 @ 6:24 pm

    I’ll hate my life anyways as long as I have a job…I’ve found that saving money makes me a lot happier than spending it, though I imagine a lot of people are the opposite.

    I think it has to do with how much your enjoy your work. For me, I spend my days doing cool computer stuff. If I retired, I’d spend my days doing cool computer stuff. Might as well get paid to do what I’d be doing for free anyway.

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