"The next time I need to buy a purse, I’m going to go big. YSL, maybe even Chanel."
Really expensive bags seem to be proliferating. "If a bunch of 27-year-olds can afford them, then I certainly can," I reasoned. Friends, ever-supportive, agreed. "You’ve earned this," one said. "You’ll have it forever," said another.
When the time came for the splurge, however, I found myself dithering. My heart was with a black Chanel quilted bag, but the outlay was literally equivalent to a third of my salary in my first job. Buying it required an appointment downtown. I would feel nervous carrying it. It just wasn’t me.
That experience was a good illustration of something I already knew: my definition of luxury has changed over the past few decades. With plentiful funds to cover the purchase (and even without!), my 30-year-old self wouldn’t have blinked; she’d have gone with the Chanel and basked in the admiring looks.
But as I’ve grown up and have more funds at my disposal, a funny thing has happened. I’m much less inclined to want or need to show what I have than was the case when I had much less. My "luxury goods" today are much more in the category of things that make me feel good inside. And they’re not "things" at all.
This topic of what constitutes a luxury has been on my mind a lot, but I hesitated to write this article. I didn’t want to seem boastful; I know these are first-world issues. And I’m private. But I wanted to articulate what I was thinking because, over the years, many financially "well-off" people have shared variations of the same sentiment. Their need for outward shows of success has been inversely correllated with their net worths.
Luxury Good 1: Putting Money in its Place
The biggest luxury of being financially well, I’ve realised, is making sure money doesn’t have an outsize influence in any of the major decisions I might make and, most of all, that it doesn’t cause stress. Has the price on flights for our upcoming overseas trip shot up since we first looked at them? Not ideal, but let’s stick with our plan. If my husband or I decided we didn’t want to continue working in our current jobs for whatever reason, we could hang it up without running any numbers; no salary is worth dreading the alarm clock.
Most of all, I can’t envision a financial catastrophe that would be large enough to derail our security and our plans. The peace of mind that accompanies having money in the bank and in our investment accounts isn’t a conventional luxury good, but it’s one that I treasure more than I ever could a head-turning car or a logoed tote bag.
Luxury Good 2: Not Having a Budget
Not having a budget is another of my luxury goods. For years, I was sheepish about not budgeting, or at least not budgeting in the conventional way that every single personal finance book (uh, including my own) recommended that people do.
My husband and I tried sticking to a budget early on in our marriage, when our finances were tighter and we were saving for a down payment on our first house. We wrote down all of our expenses; we grouped them into categories. We conferred with each other before buying any big-ticket items. But as our salaries grew, we realised that there was a much simpler way to financial well-being, one that was administratively much less taxing and much more conducive to marital harmony.
Rather than tracking each expense line item by line item, we set our monthly targets for saving and investing, then automated those contributions to our retirement accounts and taxable brokerage account. We set fairly easy targets at first and increased them as our incomes grew. Any funds left in our checking account were there to do with as we pleased. We’ve never looked back, and we’ve never had to raid our investment accounts.
Luxury Good 3: Holding Cash
The net effect of that approach is that we always seem to have more cash knocking around in our nonretirement accounts than we really need. Bonuses stack up, and in fallow spending periods like 2020, the inflows well exceed the outflows. We try to move the money into our long-term accounts, but we’re sometimes slow on the draw. And if I were to analyse the biggest financial "mistakes" that my husband and I have made over our investing lives, I’m quite sure holding too much cash would be one of our biggest. It certainly detracted from our investment returns, especially when you consider how low safe yields were over the past few decades.
Yet our cash (like the cash in the Bucket approach that I often write about) provides us with a big intangible benefit: peace of mind. If we’ve needed to buy a car or if our old house has required an expensive repair, we’ve had the funds to cover the expense without raiding our long-term accounts. I’m ok with that trade-off.
Luxury Good 4: Not Having Debt
Speaking of having cash on hand, not carrying mortgage debt (or any other debt) is another one of my luxury goods. Whether to pay off a mortgage early is a perennially hot debate among financial planning aficionados. And in our current era, in which interest rates on guaranteed investments well exceed the interest rate on older mortgages, it’s hard to get the math to add up in favor of prepaying a mortgage. But we paid off our mortgage when that wasn’t the case: even with a low 2.875% interest rate on our last mortgage, the yield on our safe investments was much lower than that.
In my view, the only fair return comparison for mortgage paydown is on an investment that, like mortgage paydown, has a guaranteed return. In other words, don’t compare your mortgage paydown return on investment with what you might earn on your stock portfolio. The point is that the decision is personal and time period-specific; the right answer depends on whether the investor needs liquidity and whether peace of mind is a big consideration. For us, peace of mind is a big priority, and because of that, I just can’t envision any scenario where we would carry debt in the future.
Luxury Good 5: Keeping it Simple
Some people’s financial lives get more complicated as they have more to invest. They buy private securities, own rental properties, and put together bespoke portfolios of stocks and bonds. They hire more financial helpers.
But the more I have, the more I’m inclined to go in the opposite direction. Over the past few years, my husband and I have sought to get everything as streamlined as possible. Apart from our respective 401(k)s, we have one bank and one investment provider. We each have a single fund in our IRAs and fewer than 10 holdings in our taxable account – just enough to be diversified. We work with a fabulous hourly financial planner when we have questions that exceed my knowledge base, and we rely on the counsel of a trusted CPA when we hit tax issues that we needed help with. That’s it. That’s all.
Are we leaving money on the table? Maybe? But the more I know and have, the bigger my "too hard" pile has grown. I’m just not sure the extra return potential of having a more complicated financial life can rival the intangible benefits of simplicity and knowing that our investments would be just fine if we couldn’t attend to them for a long period of time.
Luxury Good 6: Being Able to Help
Finally (and I’ve written about this before) one of my very favorite luxury goods has been extending financial help to people in our orbit when they’ve needed it. This relates to my previous point about having cash at the ready. We give to charity, too. But there is nothing more gratifying than to be able to say "I can help with that" after hearing a friend or family member discuss their struggles with money, whether it’s a pet’s surgery, a car repair, or a late rent payment.
I’m smart enough to know that life isn’t always fair, and I’ve been lucky in many ways – not least that I have a financially responsible life partner who knows that he’s been lucky, too. There was a point in our lives when we didn’t have funds to spare, and we remember it. At this life stage, helping people close to me will always be my favorite luxury good.
Christine Benz is Morningstar's director of personal finance and retirement planning
