One of the impacts of SARS-CoV-2 and the economic impact and uncertainty that has resulted from the measures to control the outbreak is that many people (including myself) have seen their income reduced. In some cases this has been a relatively small dip and i n others it has been substantial.
Years ago, the Ford Motor Company had a design process for new cars in which they separated out two types of features i.e. those that the new car needed to have and those that the design team wanted to include.
In these times, you may find it useful to apply the same idea to your living expenses and separate out the needs such as housing, health care, and other living expenses on the one hand and the nice to haves such as exotic holidays and sports clubs on the other. You might want to have this conversation with your partner, spouse or any other people for who you share financial responsibility.
In my own story I took a massive pay cut when I chose to join the faculty of a business school and give up my job as a partner in an international executive search firm. I was able to do that because I had the support of my spouse who was trying to get me to tune into things which were more important and insisted that we did not need the extra money.
The thing is to determine what part of the money you and your family spend is really needed and what part is “extra”. One can, of course, reduce expectations on the one hand or find a way to make more money on the other. Using Baucell and Sarin’s model of happiness discussed a few weeks ago, however, making more money will become an endless race between reality and expectations you will may never have enough.
Financial security is important and understanding what it means for you involves looking at monthly and annual expenses You can choose to live in a larger or smaller house or apartment in different towns and neighborhoods or even move to a part of the world which has a very different cost structure.
Housing is typically number one cost for most people and represents about a third of their total spending in the U.S. just to give an example.
New York or London are clearly much more expensive than Jackson, Mississippi or Zaragoza, Spain in absolute terms but its also important to think about housing costs relative to local salaries.
The question is what kind of housing makes sense for you and your family. In many parts of the world, for example, a detached one family house in a safe neighborhood is only available in very exclusive neighborhoods which are very, very expensive. Other places offer better schools, access to nature, and perhaps even cleaner air and water.
While this discussion could go on, the last point is the difference between the cost of renting a place to live and the total cost of home ownership given the relatively low interest rates around the world. This calculation is different in different places but in general terms an efficient housing market, like that if the U.S. tends to make rents track closely the financial cost of owning a similar house or condo.
Transportation is usually the second biggest expense and car sales are understandably at an all time low in many markets around the world. Part of this is economic uncertainty and people just waiting to see what will happen before buying a new car.
A second issue is the gradual shift away from car ownership to to other forms of mobility services including public transportation, companies like Uber and Lift, and other emerging business models
A third issue is that the recent crisis has taught us that working from home is not only possible but saves time and increases effectiveness for many people. Although I think its too soon to tell what the long term impact will be, clearly we may need less transportation in the future.
- Health Care
Health care and health insurance are large items particularly in the United States which has no national health coverage unlike many countries around the world such Canada, the U.K., Germany and Spain.
The purpose of this discussion is not to enter into the political debate concerning health care or the challenges faced by the U.S. system during the present crisis, but to stress the importance of having coverage in case of catastrophic illness if you live in the U.S. or in another country where you can not rely on the public system for one reason or another.
- Day to day living expenses
In addition to these big ticket items you need to account for a host of day to day expenses such as food, clothes, utilities, schools, etc. The amount needed for such things depends enormously on our choices about where to live as these costs tend to track housing and are much higher in some places than others.
In addition to location, our choices also drive the budget we need. Organic food, for example, usually comes at a premium price and meat costs more then vegetables.
Schooling is a complex subject and again depends on what part of the world you live in. In the U.S., schools are managed by local school boards and often financed through property taxes so that expensive housing often brings high quality public schools as part of the package. Many people opt for private education for a variety of reasons and there is a growing movement toward home schooling in certain parts of the country.
- Nice to haves
While there is no clear rule between wants and needs which can be applied to everyone, in your life it should be possible to separate the day to day living expenses from things that would be nice to have.
You may for example consider the latest smart phone and an unlimited data contract as absolutely essential while someone else might think its clearly an option. Other electronics, expensive cars, vacation homes, etc. all depend on your personal point of view and I do not pretend to tell anyone what to do or how to think bout such things.
What I do recommend, however, is that you think to yourself or with your family about what you really need and what is clearly optional. Going back to the idea of engineering happiness, Baucells and Sarin recommend gradually working up to higher levels of goods and experiences over the course of our lives so that we find satisfaction in every step along the journey.
This chapter would not be complete without some thoughts on saving and retirement. In my experience money does not buy happiness at any time and in particularly later in life but its absence can cause insecurity, distress and worse.
A related question is that we are, in general, leading longer lives and the tremendous advances in medical technology over the last years not only makes us live longer but allows us to enjoy a much more active life up through our 70’s and 80’s if not beyond.
One of the key questions to consider in this context is how much is enough for you? Once upon a time someone might have thought that making a million dollars or euros would be plenty for many people, that would not be enough to support their lifestyle till the end of their days.
The objective of the discussion is not to summarize the field of financial planning or paraphrase books such as Lee Eisenberg’s The Number, but to add a place holder to the discussion so we can factor in savings into the overall equation.
Many people, of course, are using their savings during the current crisis. We save money for our retirement but also for the proverbial “rainy day” when things are not going so well and this is clearly such a time for many people.
- Do the Math
If you have seen your income drop or are concerned that it might, my advice is to revise your monthly budget and perhaps make difficult choices about where significant money can be saved on a regular basis.