Money Matters | Necessities vs. luxuries
TVs. Laptops. Cellular phones. Turn on any device and you are constantly bombarded by commercial advertisements to consume. Facebook. Instagram. Snapchat. Interact with anyone on social media and you are constantly flooded by social advertisements. Food. Entertainment. Fashion. Every company wants you to be their customer and every customer wants you to be their audience. It should come as no surprise to anyone then that we are a nation of hyper consumers.
This constant pressure of conspicuous consumption sometimes makes it hard to tell in modern society what is a necessity and what is a luxury. The lines are blurred. It creates a horde of consumers who, if you asked would know the price of everything, but not necessarily the value of anything. In this kind of environment, it becomes essential to think about and know these differences.
Classical economics describes luxuries as goods for which consumer demand increases as income rises and necessities as goods for which demand remains relatively constant as income rises or falls. Necessities such as toothbrushes and toilet paper are basic for everyday life, but you do not buy more or less of them as your income fluctuates. On the other hand, overseas trips and fine jewelery are examples of luxuries that people spend more money on as their income rises (and less as it falls) but are not necessary for basic life. One additional key characteristic of luxury goods is that they are often scarce and or expensive.
To be fair, classification is sometimes not as straightforward as in the examples above. The complicated thing about defining necessities versus luxuries is that classifications can change over time and dimensions can be interchangeable. In 1997 you would not have classified having access to the internet as a necessity but in today’s society it is hard to argue that it is not. On one dimension, it may be a necessity to own a mobile phone in 2017 but if you buy an Apple iPhone, that purchase arguably changes into a luxury.
Instead of starting with theory and working down, let us begin with the basics instead and examine some categories that nearly everyone agrees on – food, clothes, water and shelter. Translating these into modern terms equates to groceries when you need them, clothes to wear every day, access to clean water for drinking and bathing and an apartment or house to call home. To round out the list of practical necessities, I would add three other categories – transportation, utilities and insurance. That is, any money spent on electricity, a phone plan, public transportation, automobile ownership or monthly risk protection for your car or home. Everything else, despite a heated argument on the matter, is not essential and probably even optional.
Some additional things are worth mentioning: At the risk of stating the obvious, necessary goods are not necessarily free goods. They must still be paid for. In addition, the price you pay matters. This is because price has the potential to turn some necessary goods into luxury goods (like the iPhone in our earlier example). Before you buy your next item or as you consider what category to assign that item to, resist the temptation to compare what you have to the consumption broadcasts of your friends and neighbors. Be aware of and eliminate the tendency to associate conspicuous luxury consumption with status. You cannot really know someone else’s true financial situation, and expensive material purchases do not always equate to financial comfort.
Do what is best for you and your financial situation. Is your life going to materially change for the better every day for a long time with this purchase? If the answer is maybe or no, it is probably a luxury and it can wait or be avoided. Are the consequences of not purchasing this item going to negatively impact your life considerably every day? If the answer is yes, it is probably a necessity, and you should try to get the best deal available on it.
Why does all of this matter? Because in order to maintain or regain control of your personal finances, you need to be able to identify which of the goods you consume can be reduced, substituted or eliminated. Luxuries can be eliminated entirely. High priced necessities (crossover luxuries) can be substituted with lower cost ones. Normal necessities can be reduced with prudence. These definitions and the influences they have on purchasing behavior should be considered crucial to anyone who does not have an unlimited money supply.
• Ramon Simms is a management professional with over 10 years’ experience at the intersection of finance, operations and technology. He holds a BA in financial economics and an MBA in entrepreneurship. He is a managing director at IFF Lts (www.iffpros.com), Bahamas and you can reach him at [email protected]