Comments
I recently met a friend's friend who had just been promoted to a senior position with a large salary increase. This person was talking about saving a significant part of his incremental salary to buy a second house. This is difficult for a typical person. Why?
You may have heard of Parkinson's Second Law, which states that “expenditure rises to meet income”. It means that we are highly unlikely to save more just because our income has increased.
Consider the behavioural argument. My friend's friend has three cars and lives in a big house in a mass-affluent neighbourhood; other houses are smaller and have only two cars. Now, suppose his promotion requires him to move to an upscale neighbourhood. What if all houses in that neighbourhood have at least four cars? His garage suddenly pales in comparison to his richer neighbours.
Effect on savings
Now, happiness is not so much about being rich than it is about being richer than your neighbours. This behaviour for conspicuous consumption has profound financial implications. As you rise rapidly in your organisation, your affluence changes as will your neighbours. And with it comes the compelling need to spend more to maintain social status. It may be, hence, difficult for my friend's friend to save enough to buy a second house soon. This behaviour also, perhaps, explains why not all people who rise faster in an organisation necessarily build wealth.
Behavioural economists have long realised our difficulty to save. That is why we have investment products and vehicles that help us save better. Consider the systematic investment plan. An auto-debit instruction to the bank can help us transfer a sum every month to a mutual fund. You can build wealth by transferring a sizable part of your salary increase, assuming you control your conspicuous consumption. This process should be implemented before you enjoy the salary increase. Otherwise, you could be a victim of Parkinson's Law.
(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.