In a recent survey, 71% of respondents felt that their standard of living would be lower coming out of the current recession.
What? I was quite shocked when I read that. But to start with, what is a lower standard of living? Is it less income? Is it less cash flow to buy all kinds of stuff? I would bet, for the majority of people, those two make up majority of the responses.
But does our standard of living decrease when we cannot buy a new iPod every year? Are we somehow deprived when we cannot afford to go out for dinner twice a week, or afford the payments on a new car every three or four years?
How many of us are confusing consumer spending with wealth building? How many would take a cut in pay, if we were assured we would have more savings, a growing RRSP, and at least an emergency savings account? All of those build wealth, whereas our spending is a wealth robber!
Is our standard of living somehow affected when we DON’T drive a new car? I would bet for most people that may be their thinking. But isn’t it exactly backwards? If we drive a new car, we now have a big payment going out the door, and our standard of living decreases exactly BECAUSE we have this new car to finance! So is someone’s standard of living better or worse when they can bank a ton of money by not having car payments?
I ran into a lady recently, who really wanted some help in getting her monthly expenses under control. When I asked her how much a month she wanted to save, she didn’t have a number in mind at all. Well, isn’t that kind of like getting into the car and starting to drive, with no idea where you want to go? In order to save money, you need a number – a firm goal of where you want to go and what you want to accomplish! After that, it’ll become a whole lot easier, exactly because you have a goal and a fixed plan.
But while I was talking to her, she was playing with her iPhone. When I asked what her monthly bill was for the iPhone, she became rather sheepish, and it took a bit to confess that it was around $130 a month. Yikes! Mine is around $25 a month, and it makes phone calls, too. Yet, that was something she just didn’t think she could ever do without, and proceeded to attempt to “sell me” on the cool features and gadgets. Nice try.
There is something economists refer to as our marginal propensity to consume. It’s a fancy term for saying: when we make more income, we spend more money right along with it. A $500 raise, and pretty soon, we’re spending to our new and higher income level. It works for us average people just as much as the rich. It’s how Michael Jackson earned around a billion dollars, yet died about $500 million in debt!
We need to be careful with the yardstick we use to measure our standard of living and not confuse “stuff” with wealth. For many people, their thinking is backwards: It is their stuff which reduces their wealth, and not the other way around.