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Tyler Durden was right
It appears the U.S. may be headed for the elusive ‘soft-landing’ that seemed improbable not too long ago. Part of the reason is the pace of inflation is slowing. That does not mean prices are dropping. It means prices are growing at a smaller rate than they previously were.
Consumers may be slowing down on certain purchases and/or experiences they splurged on during the post-pandemic years when flush with cash and stimulus savings.
This is a very difficult thing to do, though, and typically only out of sheer necessity. Increased spending habits and a seemingly ‘better’ lifestyle is hard to retrace from. In theory it is easy - your discretionary spending should decline if your income and ability to spend declines. Humans are not that simplistically rational, unfortunately.
We may tell ourselves that we can easily stop buying the morning coffees and nice lunches, dinners, entertainment options, fancier clothes. We don’t think about the elevated car payments once we test drive the nicer model. We don’t want to go back to the discount retailer after wearing ‘better’ brands.
When our finances get tighter, reality does not always follow simple theory. In theory, there is no difference between theory and practice. In practice, there is.[1] We still want those things. We still think we can afford those things. We desire those things because they become part of our identity. Those items and experiences are part of us. I am someone who wears xyz brand, drives a luxury car, vacations in exotic places, etc. There is a difference between being able to pay for something and truly being able to afford it.
There is a reason consumer spending makes up about two-thirds of our GDP. We are a consumer nation. We like to consume and do not like to consume less than what we are used to consuming.
Telling ourselves we will only buy this item once, or this is just a reward for myself, or whatever the justification is only sets the bar higher for next time. It is psychologically painful to admit to ourselves that dialing it down is the right thing to do, even if we know it is the smart thing to do.
Staying on course for meeting our goals requires being smart, not appearing that we can afford to live like others. Maybe that guy driving the new sports car is stretched thin and can barely afford gas after his monthly payment. Maybe your neighbor is maxing out their credit card furnishing their large house. Maybe your coworkers are stealing from the future by not funding retirement accounts to live a ‘better’ lifestyle.
Comparisons are tough. There will always be someone with nicer clothes, nicer houses, nicer cars, nicer things. And maybe they can afford it. That does not mean we need to have those things, live that lifestyle.
There’s a great line from the movie Fight Club where Tyler Durden, played by Bradd Pitt, says the “things you own end up owning you”. Owning your ability to safely retire, pay tuition bills, take an affordable vacation, means you need to own your impulses and understand the trade-offs for every dollar spent on a desire.
This is not meant to say we should never spend money and live off bread and water while sitting in our house doing nothing. It is just a testament to the constant behavioral tug-of-war we deal with. Some solutions might seem obvious – like a major purchase. Others could be less so, like the little things that add up over time.
On a personal note, investment advisors and financial advisors also must live with these choices. We are not immune. We are also human. But we do spend a great deal of our time and effort to understand these behaviors and implement proper systems to make sure we are not undermining our own futures.
Ultimately, financial decisions often involve uncomfortable choices. Growing accustomed to that initial discomfort is what leads to future comfort. Just like getting used to higher spending, we can get used to intelligent budgeting and higher saving. Admittedly, the latter is more difficult than the former. This may involve a mental shift of what ‘rewarding yourself’ means. Instead of instant material gratification, you are rewarding yourself with a ‘better’ financial position by saving and deferring current spending.
Personal financial planning is personal. It is not based on what others are doing. A good financial plan will only look at your life. It won’t make relative comparisons.
It is not easy. Tyler Durden understood it.
P.S. If you don’t understand the title, it is part of the conversation from the movie linked above.