The Seductive Lure of Luxury
Many people who make a very comfortable living, with steadily rising income, can't seem to accumulate any wealth.
By Knight Kiplinger, Editor in Chief
From Kiplinger's Personal Finance magazine, January 2004
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As a sometime procrastinator, I'm all too aware of the wisdom of Parkinson's Law, which posits that "work expands to fill the time available for its completion." And as a longtime observer of how people handle their money, I've come to believe that there is a financial corollary to Parkinson's Law: "Household spending expands to consume rising income."
This law explains why so many people who make a very comfortable living, with steadily rising income, can't seem to accumulate any wealth. They're always vowing to start saving some real money someday -- as soon as their income rises a bit more. Their problem, of course, isn't how much they earn, but how much they spend. And their overspending is likely rooted in an inability to distinguish between needs and wants.
I need, I want
The blurring of this needs/wants distinction helps fuel our consumer society. After all, the whole point of marketing is to convince consumers that things they once considered to be optional luxuries are now typical necessities of the good life.
The success of this process over the past two decades has resulted in what I call the democratizing of luxury. Today as never before, American households at virtually every income level seek products whose price, quality and prestige clearly exceed the functional need to be met.
Rising personal income -- especially in highly educated, dual-income households -- made this splurging possible. But much of it isn't truly affordable, because it's being financed by a surging tide of consumer debt. And it's crowding out saving for future needs, especially retirement.
Okay, some examples: Production of luxury cars keeps soaring, thanks in part to easy financing with short-term leases. The 27-inch color TV is being replaced by elaborate home theaters with giant flat screens and throbbing sound. Middle-class preteens get their nails done professionally. High school kids are ferried in rented, stretch limousines to proms held in hotel ballrooms. Elegant plumbing fixtures, granite and marble kitchen counters, and oriental rugs are on display at the home-and-hardware superstores.
A generation ago, before luxury went mass market, many solidly middle-class consumers prided themselves on living simply. They knew the difference between needs and wants. They were proud that their savings were quietly growing, and that their increasing net worth wasn't evident to all the world. Not surprisingly, America's personal-savings rate was a lot higher a generation ago than the historic lows of recent years.
By holding fast to these values, many Americans accumulated surprising levels of wealth. They are the people described in The Millionaire Next Door, the eye-opening book by Thomas Stanley and William Danko that was published in 1996. As these marketing professors demonstrate, conspicuous consumption may denote a high level of income, but it's rarely a reliable indicator of net worth.
Pay yourself first
I know that everyone has a soft spot for certain indulgences, and I don't begrudge anyone his or her personal passion. The trick is to be selective in your luxury-buying, without abandoning your savings plan. If you're one of those people who say they never have anything left over after paying their bills, try the time-honored technique of paying yourself first. Make that first check you write each month a deposit into your investment account. Better yet, set up an automatic payroll-deduction plan with your employer and a mutual fund. If you come up short after trying to pay all your bills, you'll know what needs to be trimmed -- some of those wants that you redefined as needs.
Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance and of The Kiplinger Letter and Kiplinger.com.