Think & Create

By Alex Green

The recent decline in home values and the stock market – not to mention corporate and municipal bond markets – has left most investors with less than they had a year ago. To meet their long-term investment goals, many will have to spend less and save more than they originally planned.

This is not easy. As the economist Adam Smith wrote in The Wealth of Nations in 1776:

“The desire for food is limited in every man by the narrow capacity of the human stomach; but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary.”

In the current economic downturn, many of us are unable to afford all the things we want. That pinches. But should it make us unhappy?

That depends. But for most of us, the answer is a resounding no.

As Harvard psychologist Daniel Gilbert writes in Stumbling On Happiness:

“Economists and psychologists have spent decades studying the relation between wealth and happiness, and they have generally concluded that wealth increases human happiness when it lifts people out of abject poverty and into the middle class but that it does little to increase happiness thereafter. Americans who earn $50,000 per year are much happier than those who earn $10,000 per year, but Americans who earn $5 million per year are not much happier than those who earn $100,000 per year. People who live in poor nations are much less happy than people who live in moderately wealthy nations, but people who live in moderately wealthy nations are not much less happy than people who live in extremely wealthy nations. Economists explain that wealth has ‘declining marginal utility,’ which is a fancy way of saying that it hurts to be hungry, cold, sick, tired, and scared, but once you’ve bought your way out of these burdens, the rest of your money is an increasingly useless pile of paper.”

If this is true, why are so many people out there busting their humps for more?

For some, it is the pursuit of financial independence, a worthy goal. But for others, the answer lies in their increasingly materialistic ways.

We all must consume to survive, of course. But when consumerism becomes an end in itself, when it overruns more important ideals, provides the measure of our success, or corrodes our capacity to know truth, see beauty, or feel love, our lives are diminished.

Some will argue that for economies to flourish, we need rampant consumerism. It is consumers’ insatiable hunger for more stuff that fuels the economic engine.

In many ways, this is true. In fact, the notion itself is hardly new. In 1759, Adam Smith wrote in The Theory of Moral Sentiments:

“The pleasures of wealth and greatness… strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it. … It is this deception which rouses and keeps in continual motion the industry of mankind.”

Notice that Smith, the father of the concept of free markets, referred to the endless pursuit of more as “this deception.” He recognized that the needs of a vibrant economy and the requirements for us to be happy as individuals are not the same.

Studies show that the riches and material goods we desire – should we have the good fortune to acquire them – won’t necessarily make us happier. Yet we often imagine they will, even when experience teaches us otherwise.

Walk into your local auto dealership, for example, and check out the cars in the showroom. They look sharp. They smell good. The tires have been blackened. The exteriors have been waxed and polished and Windexed until they gleam. In short, we are seduced by their newness.

And even though we know that a new automobile is perhaps the world’s fastest-depreciating asset – and within weeks we will be mindlessly traveling from point A to point B without a second thought about our vehicle’s make or model – we plunk for one.

As my grandmother used to say, “Most people can’t tell the difference between what they want and what they need.” (This remark, incidentally, was generally directed toward me and my latest two-dollar object of fascination at F.W. Woolworth.)

Look around today and you’ll have no problem finding folks with plenty of neat things: big cars, fancy boats, the latest electronic gadgets, and all sorts of expensive “bling.” They seem to have it all. What you may not realize is how many of them are two payments from the edge.

Yet some middle-class Americans remain obsessed with what they don’t have. To some, it just doesn’t seem right – doesn’t seem fair – that others have so much more than they do. But as political satirist P.J. O’Rourke observed:

“I have a 10-year-old at home, and she is always saying, ‘That’s not fair.’ When she says that, I say, ‘Honey, you’re cute; that’s not fair. Your family is pretty well off; that’s not fair. You were born in America; that’s not fair. Honey, you had better pray to God that things don’t start getting fair for you.’”

Often times, the family budget is a source of conflict.  Most of the time, the major earner makes the final financial decision, which isn’t always a welcome deal for the rest.  Since money is such an intrinsic part of family life, families need to achieve accord in this aspect.  There is a four-step cycle in budgeting the family money to maintain peace and harmony.

1. Set your priorities.  

Priorities are different from goals.  They are aspects in your family’s life that you, as a family, want to set focus on, say health or children’s future.  While goals are specific targets that support priorities.

In setting priorities, do not set too many as it defeats the purpose.  Ideally, there should only be one, but because life is not ideal, 2 to 3 are reasonable. 

As the priorities are set and agreed upon, write them down.  Post the paper where everybody can see them to remind them of what your family is focused on for the next few years.

2. List down your goals.

Once the family has set and agreed on priorities, the next step is to set the goals.  Goals are specific and measurable conditions that, when achieved, will support the priorities.  

In setting goals, establish a target that is both challenging yet achievable.  A 10-15% of the family’s income is a good savings target for a child’s future education: stretching yet reachable.

Try to limit your family into setting 1-2 goals per priority, to maintain focus.

3. Work towards your goals.

After setting your priorities and goals, start living by them.  All of the family’s activities will be geared towards working at your goals.  Track progress, particularly on financial goals, by using an income and expense-tracking tool.  The simplest way is to get a notebook and list down all expenses and incomes and set a budget for future spending.  There are those that invest in computer software or a family accountant.  Whatever it is, the important thing is to have a system of monitoring the family’s performance towards achieving their goals.

4. Evaluate your family life.

At a certain point in time, when you feel like it’s time to evaluate your life, check how your family is doing against the goals.  Goals that have been achieved can be checked off the list, and new ones can be formulated.  

At times, in major changes, say a career move, or when a family member goes away, it may be time to re-evaluate priorities. When such a time comes, then the cycle begins, just like what it’s for: life! 

If you are in charge of creating the family budget, chances are, you’ve had the unfortunate experience of having a brilliant budget plan that isn’t executed well. This happens to many families and couples, and with a little attitude tweaking, you can solicit the help of your family in making your budget work.

Create a family budget vision. Talk to your spouse and children about whatever budgetary constraints you are facing, or whatever financial goals you intend to set. By being completely honest about the bills and loans you have to pay, or your intention to save a certain amount of money for a family emergency fund (or a college fund, for that matter), you can help your family understand better your collective financial situation. This will allow them to change their perspective on purchases they make, and will help you make sure that whatever money crunching strategies you utilize won’t be counteracted by a subsequent spree by your teen. 

Another good technique is to create a list of usual expenditures per member of your family. Together, identify which items you can do away with in order to save up some extra money from your monthly income. By doing this altogether, you are making your family participate better and see the contributions they can make into making your family’s finances better.

Should your child have the habit of continuously asking for money for minor and oftentimes unnecessary purchases, you can let your children learn to manage their own week’s allowance. With their limited money to budget, they will realize the value of money.

Put a cap on the amount of expenditures you make in a week. The best way to do this is set aside a fixed amount of cash that you will spend for a week. By putting this limitation on your spending, you are forced to prioritize spending on the most essential over other things. 

Make it easy for your family to save more. How often do you eat out? Most family budgets are blown over because of the frequency of dining out and the accompanying exorbitant expense of that activity. Eating at home will reduce your expenses, not to mention allow for your family to bond over cooking at home. Do you spend on routine purchases like coffee and newspapers? Cut back on the latte and the paper, and put aside the amount you would otherwise spend. Your family’s collective saving will surprise you.

Lastly, don’t be afraid to create a most efficient driving route, as well as grouping together activities into one car trip. This way, you can save a lot on time and even on gasoline and car expenses.