Investing in the Right Luxury Goods
While reading Naked Economics recently, I came across an interesting definition of the term “luxury good.” In his book, Charles Wheelan defines a luxury good as a good for which demand increases as wealth or income increases. So, if you’re making $20,000 a year, your desire to drive a Bentley is probably not very strong — it simply isn’t possible for you. But if you’re making $100,000 a year a Bentley becomes an option, so the desire to buy one grows stronger (if luxury cars are your thing to begin with…which I hope after reading this post, they aren’t).
This definition makes sense, but I don’t think many of us think about luxuries this way. For example, we may think that a Bentley is luxurious while a Toyota is not. But why do we have that preconception? Is it because a Bentley costs more? Not exactly. Going to the dentist costs more than toothpaste but we usually don’t consider a root canal to be a luxury. We see a Bentley as a luxury because regardless of how much it costs, we know deep down that we don’t need it. You’re never going to feel bad for someone because they can’t afford a Bentley.
But notice what that definition of luxury good leaves out. It doesn’t say a thing about value. It implies that because you are rich you want the good — not because it’s useful to you, not because it will make you happier, and not because you need it to survive. At this point I’m tempted to yell out “stop buying luxury goods because they don’t help you reach the goal of peak happiness!” but we’ve all heard that money can’t buy happiness, thank you very much, I’ll go buy my Bentley anyway.
There’s another way to look at this, though. What if I told you that there is a useful luxury good on the market and that you should go out and save for it immediately? Hint: it’s not a KitchenAid Mixer, unfortunately. This good is something we’re all familiar with in concept: freedom! We want it for the whole world, but sadly it’s often lacking in our own lives. The more you save, the closer you are to financial independence and to that elusive goal of freedom.
Now you might be thinking “but Nathan, I want freedom and I’m poor! So clearly it doesn’t meet the definition of a luxury good.” Well to that I say, prove it. By spending more on goods in our present (or saving for useless luxuries like fancy cars) we are implicitly saying “I want to be a wage slave forever. I’m fine without my freedom, thank you.” Yet the more you save and the more wealth you amass, the more you try to find ways to accumulate more wealth in a quest to achieve that freedom. The willpower to get to financial independence grows stronger the wealthier you are because the goal comes within reach!
I’m a firm believer that anyone, with the right work ethic and dedication can achieve freedom from financial constraints much earlier in life than they thought possible. I recognize that to someone who believes they are barely scraping by, regardless of their income, that desire to reach financial independence might seem misplaced, impossible even. But as anyone who increases his or her savings rate knows, watching your net worth grow at a steadily compounding rate makes it obvious that building wealth is possible, and this positive reinforcement encourages us to work harder to make our financial independence a reality.
The game of luxury goods, freedom included, is all about the desire to have the good relative to the belief that the good is actually possible to have. Financial independence is possible with a smart plan and the will to make that plan a reality. It’s a luxury good that will take you farther than a Bentley to any destination you can imagine.
Nathan is CEO of Monte Largo Financial Advisors LLC.