The Pernicious Lie

“It will always be tough.”

Several years ago, I experienced a significant pay raise at my job and found that my money was melting away and I wasn’t sure where to. I was living with my parents to avoid paying rent and was using a large part of my paycheck to pay off my student loans, but I began to question why I wasn’t making faster progress despite the pay increases.

“You know, it will always be tough,” my mom told me.

Now, to be clear, I’m not saying my mom is trying to spread pernicious lies. But I am trying to say that my mom’s reaction that day is characteristic of a broader social problem, this belief that life is so difficult and there is never enough money. I have read articles about families making $200,000 per year and complaining that “it’s just so hard to make it.” A cursory look at their expenses basically revealed that people are not naturally intelligent creatures.

Scarcity is an old and neglected economic term. One major and influential economic theory states that human desires are infinite while resources are finite, thus producing scarcity. In a scarce environment, supply and demand rule, and thus is born the market economy. The whole Occupy movement was created to protest the lack of capital among the “99%”, blaming this on misconduct by the “1%” who have hoarded capital (I’m not going to take a position on this here). We see this in political movements, but we all see this in personal finance contexts, where people lament just “how hard it is to get by” and how “you just can’t support a family on $X per year”.

A common theme, something I discovered within myself that day, was no matter how much one earns, the money never seems to be enough. But how was it that at lower pay, I had everything I needed, and at higher pay, I still had everything I needed but didn’t know what had actually happened to the difference?

We all know I was spending that extra money. It’s not rocket science. We humans have this amazing proclivity to increase our expenditures when we increase our income. We have more money, so we spend more money. After all, human desires are infinite. I can sit down at any time and make a list of things I would like to own if I either had the money or money weren’t a factor.

Now, I have read that wages have not increased with the cost of living. Especially here in Denver, I’d say most of people’s expenses are being dumped into overpriced houses and overpriced apartments, and many jobs do not earn enough money to cover these expenses and most other necessities. And that sucks. But I also want to explore this more.

The market is not your friend. Technology tells you how much it can improve your life and increase your creative juices, and help you to make money from your own innovation. Car companies tell you to treat yourself to the new car smell and gain prestige for the good hard work that you do. Cereal companies tell you that you are a good mother for feeding your kids a nutritious breakfast. Insurance companies tell you how secure you will feel knowing your money or health is protected. The problem is that we believe this. Because of scarcity, because of supply and demand, everyone wants your money. And you’ve been raised to spend that money on the products those people are selling. You go to work and depend on your company to sell things so that you continue to have a job so that you can continue spending. We all know this cycle. It’s not good, and it’s not evil. You could potentially extrapolate this message from the “labor” Adam is forced to perform in Genesis. Nonetheless, we spend because we believe it will make us happier, that it will satisfy x or y desire or “need.” This becomes ingrained in our understand of what “base subsistence” even means. Dave Ramsey has a great story about how, when he was going bankrupt, he absolutely refused to give up his Jaguar until the choice stopped being his. “But I need this!” we all say. “How can I live without this?”

I also want to approach one major objection to Financial Independence. People love to criticize it when they have kids. “Haha, yeah, I’d like to see you live like that once you have kids!” Clearly, kids cost millions of dollars, despite the fact that humans have successfully raised them for hundreds of thousands of years before the market economy existed.

When I was a child, I really wanted these flip-head Power Ranger action figures. You pressed the belt and the head flipped from mask to no-mask. I thought it was super cool. But my parents refused to buy me any for the longest time. Do you know what I did? I had these large Power Ranger marbles that stood-in for the action figures, took on personalities and went on adventures all the same. I wouldn’t have even cared if I hadn’t known the action figures existed (demonstration-effect theory, anyone?). Those marbles probably cost a few bucks compared to much more for even just one action figure. Spoiler: I did eventually receive one for my birthday, if I remember correctly.

I’ve always been fascinating when reading ethnographies to learn that many indigenous children grow up making mud or baked cow-manure figures to play out social roles they see around them. Cost $0 USD??? It sounded like they were happy. I guess you’d probably get a call from social services if you baked some cow patties and your neighbors saw your kids out playing with them, but while I’m joking I’m also not, and that’s just a reflection that society is not a perfect representation of reality, and cultural norms can be flawed. What you can derive from this is that your kids don’t need expensive masses of toys to be happy. We’ve shuffled them into an immaculate toy world where everything is about toys. It’s just sad.

Also for the record, toys are only one category of overspending on children, but I’m beginning to suspect I could fill a whole post with more. “You don’t have kids, you can’t talk!” No, but I’ve seen what parents and family members buy for kids and it’s proof that people can be idiots in their rush to give those kids a perfect consumerist childhood.

Going back to the pernicious lie, you also see people buying new $30,000 vehicles in order avoid a major $1500 vehicle repair and a day or two getting rides to and from work. Many believe car payments are essential to life. People nearing bankruptcy refuse to cancel their satellite TV service to save money. Having an iPhone is considered essential living “because of my fine taste.” I’m starting to feel negative so I’ll cut this off here, but this is a small sample of what happens.

We just are not very smart. We are so not smart that I’m planning to write about the sorts of not-smart things I have done with money.

Several months ago I was putting 12% of each paycheck into my 401k, and the stretch to 15% made me question if I could hit my other savings goals. Then I moved it to 20% and found out that I was fine and had plenty left over. So in January I will be taking the plunge and giving 30% a shot. It’s amazing how stupid I was being before, how much floating money I was leaving outside of any budget bucket, “just in case”. My goals is 50%. Currently I could reach 40%, but this would wipe out the money I plan to put monthly into my car maintenance savings and the money I would like to save for things like travel and visiting friends across the country. Most of it will be saved, but won’t be invested, per se. The easiest way to reach 50% is to get creative with living situations or find an apartment that costs less than my current (this is somewhat difficult in Denver).

Lest we feel too negative over the “it will always be difficult” maxim, there is another maxim that is also popular: “live below your means.” Many people do not like this because it forces you to assume responsibility for your actions. Yes, there is injustice. Yes, there are difficulties. Yes, some people have extreme circumstances. I hate feeling like I have to qualify everything all the time, but people hate you if you don’t. If you’re helpless, then ignore me. If you are in any control of your life, challenge yourself to live below your means. Build a budget. Understand where your money goes and why. Do you shop to feel better? Do you believe that car payments are a good thing? Are you paying people to do things you can do yourself? Do you use the things you have purchased in the past? Have you ever had buyer’s remorse? If so, how can you avoid that in the future?

If it feels I’m leaving this post incomplete, I am. I think I can really dig into more specifics by detailing my experiences and what I’ve seen other do. This applies to both good and bad.

The pernicious lie does not have to apply to you.

 

 

Assessing the True Cost of Things

Ignoring costs can lead to poor purchasing decisions.

One of my pet economic theories is that all items you can purchase can be analyzed from three cost perspectives: the initial cost, the inherent cost, and the extended cost. I’m certain I’ve picked this up subconsciously from real economists or economics classes, but it has proven quite useful in my purchasing decisions.

 

Initial Cost

The initial cost is typically the most obvious, and is the price or amount of money you pay for an item. If I’m buying a chair from the department store for $60 or a lawnmower from a neighbor for $100, the initial cost is $60 and $100 respectively. Initial costs are the only thing I record in my ledger when keeping track of my budget balances, and the great danger to initial costs is that they make it easy to ignore the other costs.

Inherent Cost

Inherent costs are those costs that are accrued in the course of utilizing or operating an item. The inherent cost of a car is typically the cost of gasoline, the inherent cost of an apartment is the cost of utilities, the inherent cost of Netflix is the price of internet service. You get the idea. Whatever relies upon the purchasing of an additional item or service is bound to an inherent cost. We are usually aware of inherent costs, but we tend not to calculate their magnitude over large periods of time. Because my commute is so long, I tend to budget around $150 per month for gasoline, but don’t want to think about how this will cost me $1,800 per year.

Extended Cost

Most pernicious and evasive is the extended cost of a thing. Extended costs are additional expenses that complement the item being purchased, and are often established by cultural norms, expectations, and habits. Most televisions or monitors either do not have speakers or come with “crappy” speakers built in. You could argue that manufacturers do this to encourage you to buy a sound bar or sound system to increase the audio quality of your television experience. Most of the people I know have a sound bar for their televisions, and this would be considered an extended cost to the purchase of a television. You may be very excited about your new 60″ television, but unless you have a sound bar, the idea may start to grow in your mind that your new television would really be better off with a nice new sound system to go with it. This is often how extended costs work.

For example, I have considered buying an XBox One S so that I could play games with two of my close friends who recently moved to different parts of the United States. Yes, Black Friday sales approach, but generally these consoles have cost $300, and I have been extremely leery of making this purchase for several reasons. First, although the console may “only” cost $300, the service to play online costs $60 per year. Moreover, in order to make the console more useful, I would want to buy additional controllers so that I could have friends over to play as well, and each controller typically costs an additional $60. Because I don’t like going through large numbers of batteries, I would probably want to purchase the rechargeable controller batteries, which cost around $25 each. So really, for a system with two controllers – and that certainly isn’t enough for having more friends over – I would be paying around $530 to get started*. Oh, and I forgot about the games. Ultimately, though, my long-distance friends don’t have the time or the access to play online, and all of these things have convinced me to set the desire aside completely. I also don’t play video games enough to justify the purchase in the first place. Many friends have decided it is worth it to them, and that is perfectly fine as long as you know what you are getting into.

Although I will be writing about houses and apartments another day, I would like to mention here that having too much space can generate extended costs. Who wants an empty room? Most people will add a guest bed, perhaps a few items of furniture, or perhaps paint the walls. Just having empty space tends to fight very strongly against our cultural expectations of interiors, and will often lead us into spending more money than we planned in order to satisfy those expectations in our minds.

I should perhaps also mention that time and opportunity cost play into these as well. The true cost of a book includes the time you spend reading it, and the true cost of pretty much anything non-essential could be the well-being of your car if you know it has issues and are trying to ignore them by purchasing something “fun”. Nothing is fun about paying for car repairs, but not doing so will cost you in added stress and strain later.

The moral of the story is, don’t just look at sticker price (the initial cost). Consider the ramifications your purchases will have in other areas of your life and across your wallet. When you understand these costs, you are positioning yourself to make better decisions with your money.

 

* I forgot that most consoles already come with one controller, so this total may be $470 instead, or maybe you decided to buy an additional controller without the rechargeable battery 🙂