The New World Economics Guide to Curing Affluenza

The New World Economics Guide to Curing Affluenza
June 16, 2013

I’ve talked in the past about “Scarcity and Abundance.”

September 20, 2009: The Problem of Scarcity 2: It’s All In Your Head
September 13, 2009: The Problem of Scarcity

At that time, I presented a hypothetical example of a typical American household, making $250,000 per year from two working parents. This is 5x the median U.S. household income of $50,000. Five times more! In one of the most materially abundant societies the world has ever seen. And yet, instead of abundance, people in these situations often feel the incessant press of apparent scarcity.

This all got a little more real, when a longtime friend of mine started to discuss his own struggles with these issues. He is fortunate enough to be in the top 1% of U.S. household income, and to get that from one working parent, allowing his wife to take care of the household and raise the kids. He is about as fortunate as any person can reasonably expect to be.

Like most American families, he spends every penny he gets. He is bewildered by this. Neither he nor his wife are typical spendaholics. They have (relatively) cheap cars — a Ford and a Toyota. They don’t wear designer clothes. They don’t have vacation houses, boats, or planes, or even a motorcycle. They don’t go on (many) big-dollar European vacations. They don’t have mistresses, drug habits, or needy relatives.

Plus, he is a little worried about the stability of his income.

Earlier, I was talking with another friend of mine. We were having coffee in a Manhattan hotel. He was telling me that he had been sitting on the balcony of a Fifth Avenue prewar co-op with a friend of his. If you know a bit about the geography of New York money, you know these apartment buildings are some of the most expensive and desirable in the city. The co-op boards are known for rejecting people like Madonna or (famously) President Richard Nixon, after his resignation. They don’t like having such riff-raff in their building.

“Look,” this fellow was saying, from the balcony of his megabuck apartment, “I make $3.5 million per year. I spend all of it. I even have some debt. And it looks like my job is not so stable.” Guess what — there are no $3.5-million-a-year jobs in the world that are “stable.” This ain’t working for the Department of Motor Vehicles.

My friend recently retired, after a successful career on Wall Street. His wife, who is about 40, makes about $400,000 per year as as an analyst. They have no kids.

“Listen to me,” my friend told this fellow. “I live in a one-bedroom apartment in the Bronx. I have no car, and no television. Think about that.”

It’s always the same story. Only the magnitude of the numbers changes.

I was thinking of what to tell my friend.

I decided that the first thing is to recognize that if you want to resolve this issue, and feel abundance (which you should be feeling, with an income in the top 1%, or the top 20%) instead of scarcity, you have to do something that is different than what other people do. Other people spend all their money, or nearly so. This is our common American pattern, whether you make $30,000 a year or $3,000,000. Yes, some people have a savings rate of 10%, as if this is some kind of miracle of frugality. It’s not. Chinese people have a savings rate of 50% — on average!

A lot of people are not actually willing to do something different than what other people do. They think they are … but they never actually do it. They just like to think they have that ability. It’s like an alcoholic or chain-smoker who can “quit anytime.” Uh-huh. Right.

What creates abundance? It’s not the amount of money you make, although that can certainly be a factor. It is about having a lot more resources (time, energy, money) than you need for your aspirations and expectations. We really don’t need very much in this life. A little shelter, clothing and food. It is actually quite minimal, and (in some but not all ways) more easily acquired today than at any time in history. Beyond that, the Internet, public library, public museum, and public park provides about everything else a person could want to enjoy all the fruits of culture.

Thus, our “needs” are … not exactly “wants” … but the consequences of our aspirations and expectations.

For example, both my friend and his wife were educated in private elementary and high schools. Their three kids go to a private elementary school. This is their “expectation.” They live in a rather nice area, in an upscale suburb of Washington DC, and the local public school is probably pretty good. Maybe not as good as their private school, but nothing shabby. It is also, in their perception (which doesn’t necessarily correspond to reality), “what other people do” who have their income and are in their professional peer group.

Thus, the process of reducing your “needs,” should begin with the process of choosing new aspirations and expectations.

I don’t think you should start with the idea of “spending less.” Penny-pinching. Belt-tightening. Taking the cheaper alternative. No.

For example, let’s say you have an aspiration or expectation to drive an Aston Martin V12 Vantage, at $180,000.

Whoops — not enough money.

OK, now we downgrade to a Porsche 911 Turbo, at $138,000.

Errrr … still not enough money.

Drat. Now we downgrade still further to a lowly Nissan Skyline GT-R, at $100,000. Ugh. A Japanese car? Gimme a break.

Hmmm … still not enough money.

OK, now we are scraping the bottom of the barrel, with the Chevrolet Camaro ZL1, at $54,000.

Not even a Corvette! A Camaro. A car for people who drink Budweiser.

This he can swing — barely. It’s a sacrifice, but it is worth it. It has a 6.2 liter V8, at 580hp, which helps make up for the Made-In-Detroit lameness of it all. If you squint, you can still see a sort of Steve McQueen manly man aura around it, although maybe only if you are over fifty.

This is the process of penny-pinching and belt-tightening. The aspiration and expectation didn’t change. The person still wants to (or expects to, which is not quite the same thing) drive an Aston Martin. Now he drives a Chevy, and is depressed. He wants to upgrade, at least to the Porsche, as soon as he is able.

Plus, in the process of downgrading, a funny thing happened: he spent all his money! He spent $54,000 on a car. The reason he spent $54,000 on a car, instead of $180,000 or $100,000, is because that was all the money he had. Somehow, in the process of spending less, he spent everything. And still he is disappointed. First, he experiences “scarcity” because he doesn’t have the dough to drive an Aston Martin. Then, he experiences “scarcity” because, having spent all of his money on the Chevy (estimated cost-to-own of $75,671 over five years), he has no money left, and lives in fear of the briefest interruption in his monthly paycheck. Plus, he is fat and out of shape, and spends his evenings watching movies on Netflix.

So, let’s embrace a new aspiration. Let’s say the person wants to play squash at a competitive level. He gets a membership at a nice squash club for $225 a quarter, and plays there six days a week, after work.

He is having a great time playing squash. He gets better and better, and rises in the rankings. Pretty soon he is the league champion. He fully attained his aspiration and expectations. He is happy and satisfied. Along the way, he also got into great shape, is in awesome health, and looks super. Plus, he met lots of other neat people, who are also squash enthusiasts. He has no time for Netflix, so he sold his television on Craigslist.

There was no penny-pinching and no belt-tightening.

By the way, he only spent $900, on annual club dues, plus $400 on equipment, for a total of $1300. He has $53,000 still in the bank, which he invests in income-producing property. This is another aspiration and expectation of his — to acquire income-producing assets. He studies the real estate market closely, and educates himself on the details of property investment. This also takes a lot of time and effort, and is a lot of fun, and introduces him to a lot of other interesting, like-minded people, but costs almost nothing: $300 for books. So, in the process of not-belt-tightening and not-penny-pinching, he actually achieved two aspirations. Plus, the income from his property pays for his squash enthusiasms, so his net cost is zero.

He doesn’t even think about what kind of car he drives. He drives a Subaru Impreza that’s six years old and has 90,000 miles, which is good enough not to offend anyone. His car is largely irrelevant to him, because his attention is focused on playing squash and real estate investing. We can only focus on so many things, and if you focus on something like squash and investing, then you will naturally not focus on all the other things. He also doesn’t worry about an interruption in his income. He doesn’t live paycheck-to-paycheck. He is happy and satisfied with this lifestyle.

In fact, his aspirations and expectations — playing squash and real-estate investing — are actually much more worthwhile on an absolute basis than spending money on cars. The fact that they also don’t cost much is just another plus.

August 30, 2009: Summer Slack-Off 3: How To Have Fun

He enjoys a life of abundance.

Choose aspirations and expectations that are more worthwhile on an absolute basis than the common alternatives. Like playing squash, at a serious competitive level, instead of big-car-fondling. Then, you are never “giving up” anything. You are, instead, avoiding time-wasting activities, or life-wasting activities, which also happen to be money-wasting activities. It is like eating healthy food instead of junk food. It’s something you should do anyway. The fact that the healthy food also costs a lot less than the junk food is just another plus. Why would anyone eat junk food when it is not only bad for you, but also costs more? Duh. That would be stupid. In the same way, you should avoid junk activities and junk aspirations. Which are just as common, in American life today, as junk food.