Lately, I read Morgan Housel’s third book – “The Art of Spending Money”.
Personally, I was hoping to find new interesting stories in his book as Housel had written quite a lot of them in his previous two books – “The Psychology of Money” and “Same as Ever”.
True enough, his stories are plentiful and they are insightful.
Among the plenty, one insight that had my attention is found in the chapter: “Utility vs. Status”.
Of which, Housel revealed them as the two primary reasons for spending money.
Utility refers to spending money for the functionality of products and services.
Status refers to spending excess money for image and recognition which are beyond the actual function of products and services.
Here, I’ll share my reflections from reading this chapter and highlight simple tips on how we can become smarter consumers and better business people. This is best expounded by sharing who I am and what I do on both sides of the spectrum, one as a consumer and one in business.
Consumer: Am I Paying for Utility or Status?
Housel shared the difference between two car buyers.
The first chooses a high-end Toyota. The second chooses a low-end BMW.
He argued that the first buyer is inclined to spend on utility as the features of high-end Toyotas are far superior than the features of low-end BMWs. The second buyer is more image-driven for BWM is associated with status, prestige and social recognition.
Do note that how each buyer chooses his or her car is not a matter of right or wrong.
The point is – How we spend our money reflects on our inherent values.
Today, it is common for people to pay for utility and pay a lot more for status.
This includes real estate, cars, phones, clothes, travels, and even coffee.
To some extent, I do pay a premium for some “status” too.
But, the key is to be aware and mindful of the whys of what we are spending on. To me, it’s vital. This is because there are many who, unawarely, spend years of precious life energy on work for money to spend on “status” in pursuit of what they’re really after – love, attention, & recognition from their family and friends – and yet, still didn’t get much of it.
Here is an example:
There are two siblings in a family. One felt loved by their parents. The other felt rejected. So, for the rejected sibling to prove his self-worth, he worked hard and bought himself a fancier house, a nicer car, a Rolex, designer clothes, and so on and so forth. But still, he didn’t find more favour or love from his parents. As such, did he become a much happier person over time?
My hunch is nope and his house, car, Rolex and clothes that he bought couldn’t satisfy his need to be accepted and loved by his own parents.
So, the question is – “What exactly is our motive for our spending?”
That is something that all of us should reflect upon.
This is so that we don’t exchange years of our life energy onto things to impress others that are fleeting, frivolous and don’t genuinely bring happiness or meaning to our lives.
Producer: How Business People and Investors Could Earn More?
Still, regardless of Housel’s book or this article, people pay for utility and will pay much more for status.
While most people can live in relative comfort in a RM1 million home in Kuala Lumpur, there’ll be ambitious people who would like to aim to buy a RM3 million, RM5 million or RM10 million home in the city centre, even if they aren’t going to stay there and know that the home would not add onto their level of happiness.
It is a trophy asset, a symbol that tells the world that “they have arrived”.
So, what does this have to do with us as employees or business people?
Simple.
Since we know that people pay more for status, why don’t we “sell status”?
Take real estate professionals as an example. You can be an agent selling RM300,000 houses in a small town. Or, you can be an agent selling RM3,000,000 luxurious homes in Kuala Lumpur. In this instance, the art of selling is different because the profile of customers that you’re selling is different. The key is to pick up the necessary skills that could position yourself to promote such properties.
The first step to it is to know that RM300,000 home buyers are paying for utility. Meanwhile, as for RM3,000,000 real estate buyers, they are more likely to be paying for “status”.
Now, what if you’re an employee?
Are you paid by your employer for your “utility” or your “status”?
Let’s say there are two engineers. Both of them are qualified and could perform the engineering duties required professionally (Utility). However, one of them holds a MBA and has the ability to lead a department, close multi-million dollar contracts from clients and communicate his values to his bosses (Status). Who do you think would be more highly paid?
It’s the same with stock investing.
Stock investors like businesses that sell status. It is a powerful economic moat. Strong moat is a factor that dictates pricing. Hence, businesses that sell status have strong pricing power, which can translate into higher profit margin, which can result in better financial performances and so, influence its stock valuation.
It is a lot easier to compound wealth with businesses that sell status than many others, who are selling commoditised products and services (utility).
Conclusion: Sell Status, Spend Utility?
If you can effectively sell status and only buy utilities, you will be rich and wealthy.
Definitely, we can raise our earning capabilities by selling “status”. When it comes to spending, I believe we need to be aware of why we are paying for something and if it could bring us a lot of happiness that are more durable and meaningful over time.
I guess awareness of our inner motives is the starting point to becoming better consumers and producers of our financial lives.
