Saturday, December 12, 2009

Why Enough is Never Enough

A short tale on leg space, social status and the irony of human nature

Pressing up against the window trying to create some space between himself and the man sitting next to him, Joe Aspiring kept wondering how great it would be getting around by taxi. The redundant meeting he had just left only served to increase his frustration. Never ending travels by bus were one of his less desired pastimes. One more year of internship and my status will change, he kept encouraging himself.

The luxury of taxis on the company’s expense did cheer him up, for a while. It was a refreshing change sitting back on black leather, enjoying the leg space. Looking at the windows of the adjacent bus he took some pleasure in the fact he had moved up in life.

The never-ending meetings frustrated him. I wish I could have worked on the international client, he had pondered. I could use a change of scenery. How did those guys get on the international team at the first place? Probably strings were pulled on their behalf. Spending every other week abroad must be fantastic.

The taxi that drove him to the airport was taken for granted. “Could you please turn down that music?” he angrily turned to the driver. These drivers are a menace, he thought. Next time I’ll insist on a proper ride. His senior team leader, traveling with him, had told him they’d probably only meet only at the baggage area at Heathrow since he was flying business.

The check in was a nightmare, as always. Endless lines and tiresome airport security personnel took their toll on him. Stepping slowly down the aisle he lovingly caressed the wide spaced sofas of business class. Perhaps one day, he thought. Inching further he had hoped and prayed. It took an eternity to get to his seat, waiting behind what seemed like a horde of people insisting on bending the laws of physiques by squeezing huge trolleys to tiny overhead spaces. Slowly raising his eyes he exhaled deeply, 42J was right between a 10 year old and an elderly woman. He cramped himself between his fellow passengers, legs, again, tightly squeezed against the seat in front of him. Someone should look into the relationship between leg space and social status, he thought. There must be a deeper reason than economy. Perhaps a constant reminder of your worth, he had bitterly thought.

He could stand the flights no longer. His surprising upgrade to business class was nice but left a bitter taste. He felt awkward among veteran business class travelers. An accidental upgrade is just that, he thought. Look at all these people; they must be wealthy and successful, groomed by their companies. When I’ve earned the privilege of routine business class I’ll know I’ve made it in life.

When his assistant handed him his e-ticket for his upcoming conference in Rome he was disappointed to see his miles weren’t enough for a first class upgrade. Those young executives with their constant laptop tapping and blackberry staring are impossible to travel with. Sitting in the lounge he eyed the door to first class’ part of the lounge. I wonder what kind of food they serve their. It has to be better than this bagel, and the wine is terrible, what happened to the service here?

First class was his dream coming true. Such comfort, such service, I could get used to this, but who are all these Nuevo rich surrounding me?

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How Japanese manage personal finance, 2009 page turners and the lure of store credit cards @ the RoundUp

As always I try to bring in my roundup the more interesting articles and posts I've encountered over the past week or two.

From leading magazines:

Carnival of Personal Finance #234 – Weirdest Toy Crazes Edition was hosted by Suburban Dollar. My post on The Dangers of Excess Frugality – Budgeting and Balanced Living was chosen as Editor's Pick! Recognition always gives me a warm fuzzy feeling. Here are some of my favorite posts from the carnival:

More from fellow personal financier bloggers:

Saturday, December 5, 2009

The Dangers of Excess Frugality – Budgeting and Balanced Living

"Virtue, then, is a state of character concerned with choice, lying in a mean… Now it is a mean between two vices, that which depends on excess and that which depends on defect; and again it is a mean because the vices respectively fall short of or exceed what is right in both passions and actions, while virtue both finds and chooses that which is intermediate." Aristotle, Nicomachean Ethics.

A Zen Garden

The dangers of excess frugality – The slippery slope of budgeting

The first steps in budgeting are usually a real eye opener. For the first time income and expanse are laid bare before our eyes more often than not resulting in surprise and disbelief as to the proportion of expense relative to income, the volume of different expenses and usually the inadequacy of income.

A little later on the potential hits. As with any new endeavor a significant portion of the benefit can be taken advantage on early on. Potential savings and sources of money leaks are easily identified and several quick and significant measures can be taken to materially improve the family's financials.

Newly discovered personal finance enthusiasm usually leads, then, to further interest and reading which in turn leads to discovering the power of finance and compound interest. The affects of saving early are empowering and goals are set to allocate a more significant portion of the budget to saving.

Frugality often follows. Each expenditure is carefully weighted and considered against the future alternative benefit which, when compounded over time, amounts to hefty sums. Considerations such as "This $1,000 vacation has an alternative cost of $1,800 in 10 years using a 6% interest rate" are not uncommon.

Retirement planning takes up more and more of one's time as a result. Thoughts of early retirement are fascinating with seemingly small sacrifices made on the way. Slowly but surely present time is replaced with imagery of retiring at 40.

Without noticing money becomes the object rather than the means. "I only need so and so much more and I'm settled". The present soon is sacrificed for the future.

Sacrificing the present for the future

The real danger of the slippery slope presented is sacrificing the present for the future. The American public as a whole is in no real danger of this happening and the future has already been sacrificing several times over on the altar of consumption. Still, many personal finance enthusiasts quickly find themselves torn apart when it comes to spending money.

Frugality, in its moderate form, is probably a good trait. However, any excess (or deficiency), as Aristotle had so eloquently put, lead us away from virtue. Virtue or sense, in this case as well as others, lies in the middle.

Excess frugality will usually results in forgetting our original goals altogether, abandoning them to the accumulation of wealth with no real purpose. The inheritance will surely benefit the next generation but our lives are ours to live, not to pass on (again, reasonably).

The problem with sacrificing the presence for the future is the unavoidable frustration. Any extreme behavior takes its toll on the person as well on the surroundings. Being happy in such circumstances isn't easy.

I should note I obviously do not suggest sacrificing the future for the present. I am only recommending a more balanced approach.

How to achieve Balance?

Balance will be represented, in this case, by the ratio of saving to consumption. In economics permanent income suggests a person wishes to average out his or her income over one's lifetime in such a way as to not consume to much in the present or, on the other hand, consume too little (by saving too much – There is such a thing).

The rule of thumb suggests middle class households should consume 75% of their income. The rest will serve as either an emergency fund for non-expected expanses and big planned expanses (which can be expected as I've elaborated on in Budgeting for unexpected expenses) or as long term savings (equally weighted).

If you're consuming less than 60% of your income or over 85% than an evaluation of income vs. expense is in order. Some circumstantial aspects obviously exist as dual income families with no kids would present higher levels of savings while others may present less available funds for savings.

Still, the rule of thumb serves as an indicator that something may be off. In higher income levels the ratio of saving out of income is obviously higher while in lower income levels saving money is something one can only dream of.

To some the idea of spending when you can save may sound careless. I argue the good mental health and happiness include the satisfaction of everyday needs. Stoic willpower may enable one to retire early but what of the years past? Usually the best years in life.

The illusion of having compounding interest working for you

There's a reason why the 30's are considered the consumption era in one's life. Investing in education, raising a family, buying a house and other significant financial obligations put a damper on any attempt to really save for the long run.

True enough, saving throughout 20's and 30's will result in compounding interest working for us but who of us has managed to save significantly without sacrificing our present? Amassing a considerable amount of money requires many concessions, maybe too many.

The illusion of saving early is frustrating since saving at such an age is extremely difficult. For one's good mental health savings should be balanced with consumption. The 40's and 50's are considered periods of wealth accumulation and will serve the purpose of amassing wealth as well (considering you are not intent on retiring at 40 – another illusion of you ask me).

A more balanced life and balanced goals will help achieve inner peace and acceptance that money is truly a means and not an end. This takes work and time. I suppose on cannot escape the slippery slope I've presented but understanding the need for balance early on will save considerable frustration and contribute to early happiness.

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