Why you spend the way you do
You will be surprised what your spending says about you.
Last year, a friend called with an interesting dilemma.
He wanted to purchase a home espresso machine and narrowed down on the gold standard: Lelit Bianca (which was a little over Rs 2 lakh) and La Marzocco Linea Micra (Rs 3.41 lakh).
His heart was won over, but could not justify the cost to his mind. His mind believed that it was not right to spend so much on a “want”.
(This black-and-white classification of need and want is so erroneous and I shall write about it next week).
How did he tackle this conundrum?
I suggested that he leaned on the tremendous research and brilliant insights of author, professor and behavioural finance expert Meir Statman.
Statman suggests that you view your decisions through the prism of benefits. People want three benefits: utilitarian, expressive, and emotional.
Utilitarian: What does it do for me?
It must serve a purpose. A watch has the utilitarian benefit of informing you what the time is. The utilitarian benefits of a car are in ferrying us from one place to another. The utilitarian benefit of a restaurant is in feeding us when we are hungry or when we have not cooked sufficiently to feed our guests. The utilitarian benefits of investments are to create wealth so that one day we don’t have to work.
Expressive: What does it say about me?
What is the image I want to create for myself? What is this saying about me to others? These expressive benefits convey to us and to others our values, tastes, and status.
So, it is not just about eating out, but the restaurants you frequent. Where do you want people to see you? Which locations will tempt you to post a picture on social media?
It is not just any car. A Tata Nexon EV Prime will tell the world that I am conscious about the environment and I take responsibility for my consumption. On the other hand, the Jaguar I-Pace conveys the same while simultaneously screaming “STATUS”.
A Titan watch conveys something different from a Rolex. Richard Mille is avant-garde, while Patek Philippe speaks of vintage and traditional luxury.
Emotional: How does it make me feel?
An insurance policy will make me feel secure.
A huge corpus will make me feel safe.
A lottery gives me hope.
Investing in a portfolio management service (PMS) makes me proud.
An electric vehicle makes me feel virtuous and responsible.
A Jaguar makes me feel that I have arrived (figuratively, not literally).
A luxury timepiece gives me confidence like no other.
So here’s what I want you to takeaway.
We are not robots.
Humans are designed in such a way that we aspire for much more than just meeting our basic needs for survival.
We can argue about how money is being spent and which is the “right way”, and which is “good” or “bad”. But these are futile discussions because it never stops at utility. All your decisions will rest on the confluence of the above three benefits.
What we buy reflects our needs, desires, dreams, ethics, hopes, insecurities, and obligations. It even determines the identity for some people and a craving for social validation for others.
People express themselves in the houses they own, the cars they drive, the clothes they wear, the restaurants they frequent, the accessories they buy, the gadgets they own, where they go for a holiday, and so on.
Think about this: Why do we save, invest and grow our wealth?
Because we don’t want to work in our old age or be dependent on our children. But it is more than just that. It is because we fear poverty and detest the social stigma it carries. We want to experience the freedom to walk away that only a monetary safety net can provide. We want to express gratitude to our parents by offering them a lifestyle that they could never envisage. We want to make our family proud of us.
Before you go, you want to know what my friend did?
The coffee machine was no frivolous purchase. He is a coffee aficionado who one day hopes to run his own coffee bar or café.
He purchased the Lelit Bianca.
Why? I quote:
“If I had the cash available, I would have gone with the Marzocco. It is not just the basic features, but the history of the brand, the legacy, the durability… For no logical reason, my heart still wants it. Maybe I should have waited and saved for it and bought it.”
I told you, humans are not robots. Can’t always make sense of what we do.
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