I got a phone call from a client at 21:55 last night. As he and his wife aren’t young, I answered, just in case. “Steven, we’re thinking of going to South Africa in the winter. It wasn’t in the plan. Can we afford it? And it’s a long flight, so we’re thinking of business class. Is that alright?”
Cathal is 78 years of age, worked hard for 45 years and accumulated money through saving and investing. He is not in danger of running out of money at this stage of his life, even if it’s not in his plan.
I get these types of calls all the time from retired clients before making a big purchase, although maybe not quite so late in the evening. They feel more vulnerable because they aren’t earning anymore and are afraid that they will run out of money. But as Bill Clinton said when he turned 50, he had “more yesterdays than tomorrows”. In a few years time, the thoughts of a 15 hour flight to South Africa will turn Cathal right off the trip, regardless of whether he is in business class or not.
Younger clients rarely make that call to see if they can afford a big purchase. Afterall, they are still working and have that pay cheque coming in every month. Even if they know they have over reached themselves with their purchases, they can always make it back.
But they aren’t counting on the anchoring effect and the compounding of these new bigger purchases.
If you upgrade from a €30,000 car to a €100,000 car, then €100,000 is the new cost of a car to you. Next time you change your car, you will be looking in the €100,000 range. You won’t be going back to the €30,000 range.
If you take long haul flights and go business class as a treat, it will be hard to go economy for the next trip. If you are in your 30’s doing this, you have now increased the cost of your lifestyle by thousands for decades.
And while the cost of your lifestyling is compounding, do you know what’s not? Your savings! So when you do get to retirement, you have less money because you have already spent it.
The better time to spend on indulgences is when you have become wealthy, not when you are trying to build it.
26 June 2023