My wife and I are looking for a house. Recently, she proposed a model for how to think about whether we should buy a more or less expensive house. Namely, if we spend more on a house now we can’t save money for future consumption. So the question of how much to spend on a house depends on how much we value present consumption compared to how much we value future consumption.
From her perspective, the implication of this reasoning is that there is no reason to put off consumption. So we should spend more on a house now.
I think her perspective is influenced by her father’s situation. He worked hard his whole life and saved a lot of money. Now he has more money saved than he will probably ever spend. So was all that saving a mistake?
I don’t think so, because I don’t think that the “present vs. future consumption” is the way I think about money. For me it is not about consumption at all. It’s about power.
To understand the distinction, let’s consider someone like my father-in-law who has saved more money than he will ever spend (at his current rate of consumption). He, like many people in this situation, hasn’t vastly increased his consumption so that he will die penniless. Why?
The reason isn’t that he values some amount of future consumption more than present consumption. He will probably never consume those resources. So why save, then? The answer: power.
If my father-in-law gives all his money away (say, by giving it to his children) he loses influence. He has more power over his children because they expect to receive an inheritance, and if they act in a way that is sufficiently adverse to his wishes, he could strip them of their inheritance.
Now, I don’t think this is a conscious calculation. I think human beings have evolved a deep need to feel like we are contributing something to our community. If we aren’t productive, we aren’t going to be loved or respected. By retaining wealth, we retain the power to provide for our community (i.e., family) in the future.
If we give up our wealth all at once we do not have that power and we could find ourselves feeling useless — and hence insecure in our social relations. So giving up a large portion of his wealth may not impact my father-in-law’s consumption at all, but it can have an immediate impact on his power, and hence, his status.
The situation is a little more clear when there is no future consumption to weigh against present consumption. But my reasons for not wanting to over-commit financially also have more to do with retaining power than with valuing future consumption.
Namely, I want to retain power vis-a-vis my family and my employer. With respect to my family, I want to retain the ability to provide in the future. The difference being that I am in the middle of my highest earning years so I can keep contributing for a while even if I spend a lot on a house. But if I commit too much money on a house I lose a lot of power with respect to my employer (and potential future employers).
Specifically, if I commit to a lifestyle that requires me to earn a high income, I have reduced power to negotiate the conditions of my employment. Now, I have a great job and I am not currently engaged in any negotiations, but it is in my nature to prefer to accumulate power and to always be ready to negotiate from a position of strength.
So my main point here is to emphasize that the “present vs. future consumption” model doesn’t really explain my financial decisions. But I also want to touch on the question of status.
If we buy a bigger house, it won’t really impact our physical conditions much at all. We will still eat pretty much the same food, watch the same shows, and for the most part live in pretty much the same physical conditions that we do now. In fact, we might even have to give up some physical luxuries to live within our budget.
So the consumption we are talking about is really status-drive consumption. We want a bigger house to signal how successful we are. Signal to whom, you might ask? To everyone, but mostly to ourselves. Throughout our lives we develop benchmarks for determining whether people are successful members of society, and how successful. We want to achieve our own status benchmarks so that we can be happy about our own level of achievement. So even if we were to measure present consumption against future consumption, it would mostly be about status consumption.
Now, don’t get me wrong. By pointing out that my wife wants to spend a lot of money to convince herself that we are high status I am not saying that it is wrong. It’s not anymore wrong than me trying not to spend money so that I can retain power. It’s just that I want to frame the decision as one of “power vs. status” rather than “present vs. future”.
At the end of the day, both power and status are both important considerations. And the best way to understand our budget is to see it as a balance between status (i.e., most of our marginal spending) and power (as measured by capital assets accumulated by saving).
