Musings on Standard of Living

A common belief in our society is that “standard of living” is directly correlated to the “amount of money you spend on yourself”. In other words …. Higher you spend on yourself, your family or friends – the higher is your perceived standard of living. Conventionally, the one who drives the most expensive cars, lives at the best address, dines in the best restaurants, throws the best party and holidays at the most exotic locales … has the most talked about lifestyle and standard of living. The reality TV circuits globally are full of examples for this type of talked about ‘celebrities’.

The problem with this thinking though is , we are permanently led to believe that we need more money to have a high standard of living. What we have already is either blissfully ignored or taken for granted and what improves our standard of living is that next purchase, that next holiday or that next facebook update that is liked by all.

There is ,of course, nothing wrong in spending on yourself. This is one of the most basic form of self-preservation. What is important to see is the motivation behind this spending. Broadly there are three categories of spending worth exploring:

  • Spending on needs: This is the basic life preservation spend. The most important of this category is the food-house-shelter spending needed for security and well being of an individual. Anything on ensuring continuity of life or preservation of these basic needs (eg education, transportation, healthcare… etc) are also in the same category.
  • Spending on wants: These are on what you ‘miss’ but are actually not already included in the ‘needs’ category above.  As a society gets richer, majority of the spending is on the ‘wants’ category.  To be in the business, Advertisers have learnt the trick of making you miss more, so you’d start consuming more. For example – I miss the comfort/experience of ‘seeing my favourite v-music awards show in 55 inch LED TV with Bose speakers’ or I miss/need the ‘bragging rights of a new Paris holiday/Armani dress among my facebook friends’ – so what do you think I would do next, other than buying my misery away with the above purchases?
  • Spending on everything else: This is the most dangerous of all – impulsive spending on things you don’t need or don’t care – and it usually ends up in you feeling foolish, guilty or broke!
Measure your “standard of living” by what you can spend on the “spending on needs”.  If you have no problem spending on your ‘needs’ and can do so irrespective of what the future holds in store – earthquake, job-loss, global-warming, ill-health etc – your “standard of living” is beyond comparison and you should really start noticing that you have come a very long way! The hardest thing, of course, is in totally believing this against all the marketing efforts of the multinational-corporations!

 

Are you able to distinguish between wants and needs

What amazes me very often is what people think as ‘basic necessities’. For the sake of this post – let me analyse three spends of people that people claim are ‘needs’ and I wonder why:

  • Spend on Personal Transportation.
  • Spend on Anniversaries/Celebrations.
  • Spend on Latest Smartphones/tablets.

Personal Transportation: Going by a Black cab in London, a Taxi in Manhattan or an Auto in Madras – all are now considered ‘basic necessities’. Mind you, these are not the well-heeled socialites shuttling between appointments, these are normal people (just like you and me) going about their day to day life. Looking deeper there is a sense of entitlement in these seemingly “practical”, “every body does it” type of day to day activities.

Undoubtedly, there are a variety of situations when taxis make absolute sense – where not using taxis is false economy or is outright foolish/dangerous. The real question is how often are these situations? Is there an option to take a combination of walk, bike, share-a-ride or take a cheaper public transport that was clearly written off in the name of comfort?

This underlying argument can be used on all ‘premium modes’ of transportation – air, train or taxis equally. The underlying characteristic is picking an expensive transport option and justifying when there are other trade-offs available.

If a need for a taxi (or a premium mode of transport) is frequent or the norm, rather than the exception it probably means only one thing – the sense of entitlement is too strong.

Anniversary/Celebrations: This is clearly another scenario where emotion hijacks reason… and the difference between ‘basic necessities’ and excesses blur.

When people spend when they are happy, there is a marked tendency to over spend. You have seen the splurges all too often before marriages or maternity. The sense of optimism generated by the happiness or the occasion tends to make people stretch far beyond their reach. I am not questioning this tendency to stretch during genuine happiness/anticipation; what I am referring to here is our ability to create shallow “Anniversaries/Celebrations” too often.

One can commonly see justifications like – This is my 5th Anniversary, I need to book a seaside resort vacation in Maldives or this is my daughter’s 9th birthday, I need to give her an iPad!

Clearly, these events give us an impression of things ‘happening’ in our life. New photos, status updates – It happens to all others and we see that in Facebook, don’t we?  It costs a bit, but surely, we are entitled to these..!

Latest Smartphones: The marketing guys in phone companies must be laughing their way to the banks! Interestingly for them, smart phones are now used by everyone – the rich, the poor, the old, the young, the employed, yet-to-be-employed, the toddlers, the infirm – everyone.

Any problems? Absolutely not, they do satisfy people’s needs! However the real question is should you upgrade a smartphone every time (or nearly every time) a new model is available?

There may be many reasons to change the current phone – it is slow, scratched at the edges, has low memory/slow processor, has low end camera – but it still works doesn’t it? And it is probably better than your previous phone by a mile! So why should you still upgrade? The real reason you want to upgrade is not probably any problem with the old phone or any cool feature about the new phone – it is to get the “visible sense of upgrading something” in your life. You are after all entitled to good things in life right? Of course, upgrading anything else in a lot of hard work, so why bother?!

Okay, picked a few random expenses and have said that they are all due to sense of entitlement, so what?

Well, if there is a confusion between ‘basic necessities’ or ‘needs’ and ‘wants’ – it is probably because of your heightened sense of entitlement! Animals are smart enough not to assume anything, they go about their life meeting their needs as best as their surroundings allow. If you want to clearly see the difference between a ‘need’ and a ‘want’ – try challenging the belief that the world owes you something :)

Which type of rich person would you be

There are four types of rich people.

  • The wealthy who are Asset Rich but Cash-Flow Poor.  A large percentage of these are the ‘old money’, people who are born into riches or those who inherit large fortunes of money. They have large assets often earned over generations – properties, land, precious metals, antiques, paintings, alternate investments and stock portfolios, but do not have income streams proportionate to their ‘social statuses’. A more common member of this group are the elderly retired who own a property at a prime location.
  • The wealthy who are Cash-Flow Rich but Asset Poor. Last couple of decades of economic prosperity and globalization of corporations have successfully created vast numbers of this ‘new money’ category of rich people all over the world. These are commonly, the corporate crowd that have a large income (thanks to their job) but have not managed to accumulate large assets yet.
These two categories form the vast majority of the wealthy – however, these two categories are on a greasy pole (or slippery slope) when it comes to staying rich over extended periods. Of course, they can stay rich, but only with careful planning and significant asset re-allocation.

If you are cash flow poor, chances are, you may have to liquidate assets to meet some of the curve-balls life can throw at you. If you are asset poor, consistency of your income stream is now the highest risk. Added to this, socially mobile people in general, have higher ‘costs’ to maintain their life style and statuses which surely doesn’t help to preserve their wealth.

So where do the other types stand?

  • The third category, a small minority, have both large assets and large cash flows either by accident or by design and in general live sensibly, making them the most stable and uninteresting of the lot. They have tons of money, they know it and others know it. Money is no longer the driving factor in their life. This is the population of the Bill Gates and Warren Buffets of the world.
  • The fourth and final category of rich are those who have balanced their – Assets, Cash-Flows and Life-Style Costs.  In simple terms they have enough diversified assets invested to generate cash flows (income streams) needed to maintain their life style costs at all times. Having three levers to manipulate means that you don’t need to have millions of net worth to be ‘practically’ rich. This also means that if you are looking for external societal validation to define whether you are rich – this is not the option for you !

The fourth approach is surprisingly simple, because it gives everyone a fair chance or shot at becoming rich.

Which type of rich person can you realistically become in this life time?

Income vs Saving

As a society we’ve been conditioned to chase higher income.

  • Employers love it – as long as people follow this religiously, it makes it is straight forward for firms to recruit and retain talent.
  • Employees love it – in addition to the illusion of hikes ,which are often nothing more than yearly inflation adjustments, there is now a prospect of real growth relative to society.
  • Governments love it – their tax revenues are going up.
  • Banks love it – Lifestyle inflation and keeping up with Joneses syndrome ensures that higher income is automatically translated to as higher spending and economic activity.
  • Corporations love it – they can now increase their price of goods, right?
Everyone seems to love it, so where is the problem? It is a problem depending on what you wish to do with your life – move from place A to B or run faster on a treadmill at the same place.

 

Chasing higher income has moved you on to a higher gear/speed on a treadmill but has it moved you closer to your destination? All you may have done is started running faster, increased your costs through life style inflation and may now need to earn more just to sustain your lifestyle. In US media we often come across instances of families earning $200k+ in New York and being a few pay checks away from bankruptcy if they stopped working.

 

The simple alternative? Chasing higher savings! (even if Bernake keeps interest rates close to zero!) This is a more pragmatic approach to wealth creation, ie. moving from place A to B. It helps to have a higher income, but that is a means rather than the end! The trick to wealth is to reach an optimal mix of higher earnings and lower lifestyle costs which results in the largest savings (and thus investments) that is sustainable over a large time frame.

 

It doesn’t matter what you earn, what matters is what you bank!

Do you need 100 shoes

Ok, we need not have chosen to discuss shoes, it can as well be 100 shirts, 100 ties, 100 tea coasters, 100 wine glasses etc., the same arguments still hold good.

No number of shoes is enough, 100 shoes are an absolute must, should be a fairly obvious conclusion. Why bother to have a debate about this? Anyway, let me start very rationally to talk about the utility and the need for such a collection.

  • They are so practical and useful! I need a separate shoe for running, office party, red dress, tennis, purple gown, skiing,  floral dress, peach costume, ballet etc… etc.
  • They are so beautiful, they go with all my dresses. I am seen as someone in my group who has a great fashion sense and wears impeccably!
  • Well some of my shoes are given for charity events, they sell well!
Okay, we may have one too many and diminishing returns have set in … may be not all of the shoes are as useful and I don’t ski more than twice every three years. Darn!  If someone doesn’t see the usefulness of 100 shoes, let me see if a societal view sways the opinion:
  • Every one has some pet spending peeves, some spend on take-away foods, some on cars, some on cigarettes, why not on shoes?
  • We discuss shoes during our weekend parties. Everybody loves to hear where I found the (bargain or) designer shoe that I am wearing.
  • You can never have enough shoes, can we? (says one of the fashion magazine…)

Not convinced? Which planet are these people from? OMG, they probably don’t have a Facebook account too! They obviously, don’t take any serious effort to fit-in. Where do they fill their emptiness? Well, this one never fails, we are living in a free world, let me use this argument and end this once for all.

  • It makes me happy and I can afford it, so whats the problem? We are living in a free society, how can you argue against individual choice which doesn’t affect anyone or is not illegal?

So that’s it then. Cut to the chase, It all boils down to one reason – “my choice“.  While you are exercising this great responsibility of choice – can you consider choosing something that:

  • Goes easy on your own pockets and saves you from an endless cycle of work-to-consume?
  • Does not force the joneses from keeping up with you in this case?
  • Does not leave the planet with 100 extra pair of shoes to make into petroleum? Your shoes and the planet, unfortunately survive longer than you!
  • Does not send thousands of low paid workers in the east hurrying everyday to shanty factories and abusive corporations to keep up with the insatiable need for shoes?

 

Coffee and Competitiveness

Much has been talked about competitiveness of Asian economies. Somehow competitiveness of the east has been portrayed to be a direct consequence of half starving men and women working in sweatshop like conditions, scrambling for the dollars and euros thrown at them by “outsourcing” companies. Is that the true source of competitiveness for east?

Starbucks recently opened a coffee chain in India selling cafe lattes and mochas to the populace at Rs.80-Rs.160 per coffee (About $1.5-$3). This price is about 25-50% lower than the prices of UK starbucks stores, which retails about $3.75 per coffee. Western economists will gladly attribute this differential of prices to the conventional sources of eastern competitiveness – low costs, sweat shops, abysmal human rights etc.

The real price comparison, however is the local coffee which the majority of Indians drink at local shops at Rs.10-20 per cup. This unsung drink along with local chai at Rs.5-10 makes it 8-10 times cheaper than the western counterparts. Okay, agreed, unfair game – cannot compare a gourmet coffee (starbucks) with a local coffee, however, even a take away coffee in any cheap local place in the west still costs about 5-8 times a similar coffee in India.

The real source of competitiveness of east is – an alternate way of thinking and life style. East is competitive not because they can offer Starbucks coffee cheaper, it is because they have cheaper alternatives interweaved in the lifestyle that the population genuinely enjoys.