The costs of maintaining a certain lifestyle often fall in the realm of what economists call “discretionary spending.” This differentiates it from cost-of-living items like rent, food, tuition fees for kids, utilities, and transport. For the middle class, necessary expenses also include amortization for the house and car, and eating out; but not cosmetic enhancements and tantric yoga.
Discretionary spending deals with status issues and not necessities. These involve avoidable expenses which can be postponed until discretionary income (the flip side of the cost) increases.
Lifestyle can be defined in terms of supply and demand. So, on one side (demand), you can ask — what lifestyle can I afford with my present income? Taking the supply side of this equation — how much do I need to make to attain the lifestyle I want?
There are ways to subject spending to a stress test.
First, add up the basic expenses like groceries, utilities, tuition for the kids, and other necessary and recurring items. This is matched with revenue and should then yield a positive balance for discretionary expenses. If there is no balance left after the necessities, then you can forget the extra amenities of life until the next planning cycle, after a promotion or a bump in the stock market.
The disposable income after the necessities translates into availability for discretionary spending. The balance after deducting obligatory costs from revenue determines the cash for the year’s lifestyle expenses like foreign travel, liposuction, and club memberships.
The more aggressive supply side approach starts with the “wish list” (one Caribbean cruise plus a trip to Paris; a new car; a patio for the house) and then works backward to the revenue needed to achieve such a material bucket list.
What do you include in the costing of lifestyle? How detailed should it be?
Costing out a lifestyle gives an idea of where your disposable income and credit card charges are going. Sometimes, you are not even that conscious of how much things cost until you jot them down. This computation will also show how much debt you have been using to keep up with your colleagues. (He just got moved to a more expensive gated community.)
Computing lifestyle levels is a way of putting a number on the costs of social climbing. Like a good tenor, hitting the high notes should be performed with a seeming lack of effort, and no neck muscles bulging. To show too much strain in shelling out money for an Aegean cruise with your friends can be uncomfortable even to them — maybe they also want to cancel.
A retiree, which is now defined not by age and ownership of a senior citizen’s card but by a financial state where no revenues come in periodically, needs to make a simple calculation. How much does he now spend in one month and this number serves as denominator to determine how many months the savings and their pathetically small interest (the numerator) will last in number of months. Obviously this number can be adjusted to stretch out the self-funding cycle.
The usual approach to downgrading the lifestyle in the face of declining revenues is expressed routinely as “tightening your belt.” Strangely, these trite appeals to old-fashioned values (before glossy magazines glorified status — are all those people really rich?) are attributed to characters who in their prime withdrew money from actual tellers whose nicknames they knew, and called their friends from black phones with rotary dials and party lines.
Filipinos like to walk the financial tightrope without a safety net. The assumption is that children who are now making big bucks will take fiscal responsibility for parents in need. This bailout mentality does not necessarily bind the affected in-law.
Even in our old-fashioned Asian society where children are supposed to take care of their aging (and no longer productive) parents, continued support from this sector is doubtful. The expected benefactors have their own lifestyle costs to consider. It is best not to depend then on children, as they in turn should not depend on parents when they’ve left the nest or should be made to.
Computing the cost of things we need to enjoy life removes uncertainty, but not the stress. Still, it is good to check how much it costs to live it up…compared to simply getting on with life.
A. R. Samson is chair and CEO of Touch DDB.
