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{ in·deed·a·bly }

adverb: to competently express interest, surprise, disbelief, or contempt

Feeling of wealth

How much? You have got to be joking!

The reaction is instant. Instinctive. Visceral. Inducing major pucker factor, and a troubling feeling of being mugged, scammed, or otherwise taken advantage of.

It occurs with virtually every purchase for the first week or so during my sporadic visits back home.

The cause of the reaction is not rampant inflation, in the mould of Venezuela, Lebanon, or Turkey.

Nor is it (entirely) induced by greedy merchants charging exorbitant prices in a misguided attempt to recapture lost pandemic-era profits, while pleading staff shortages and high energy costs.

It can’t be explained away by the tiny domestic markets, each controlled by small oligopolies who long ago chose a path of collusion over competition. Incumbents content to retain their comfortable market shares, while collaborating to keep new entrants out.

No, the failing was mine alone: faulty mental accounting.

My sense of local value was pegged to the prices of old, based upon childhood memories.

Subsequent visits provide fleeting snapshots spaced years apart. Each a jarring reminder that purchasing power fails to remain constant, rather it erodes as relentlessly as the waves wash away coastlines.    

My absence between those visits meant I lacked the gradual conditioning to rising prices.

The locals, having lived the rises, were akin to the fabled frog who was contentedly boiled alive in a gradually warming pot of water. By contrast, my experience was that of the unfortunate frog being suddenly plunged into already boiling water. A rude shock, followed by a desperate yearning to escape, and some painful scars to provide a lifelong reminder of the experience.

My faulty mental accounting set values based upon my fallible memory. I was living in the past.

Then, a can of coke was $1 and a Big Mac cost less than $2. Movie tickets were under $10, or half that amount on “tight arse” Tuesdays. $20 bought the petrol required for a weekend getaway to the coast. A brand new 4 bedroom McMansion in an outlying suburb cost less than $200,000, which the average worker struggled to afford on their $35,000 average wages.

Today, things are a bit different. That can of coke costs $3 and the Big Mac is $6. A cinema seat is $29, but thankfully tight arse Tuesdays remain a firm favourite for cheap date nights! $70 is required to fuel the coastal escape. While that now 20-year-old McMansion would sell for $815,000, even further out of reach of the average earner’s $92,000 income.

Intellectually, I recognise that time has passed. Inflation has compounded. Prices have risen.

Instinctively however, everything feels like it costs 3x more than it should. The same reaction elicited when buying £8 pints in a City pub, food at a major sporting event, or overpriced London property.

Recently I helped my younger son with a project for school. He had chosen money as his topic, and his research turned up some fascinating facts that dramatically illustrated this same phenomenon played out over a much longer time frame.

When the pound sterling was introduced as the currency of England some 1000+ years ago, £1 could buy 15 cows.

Today, 15 cows would cost around £18,000. A single pound is insufficient to purchase a loaf of bread at my local supermarket.

300+ years ago, the Bank of England started printing paper money. £50 was the smallest denomination of banknotes initially produced. At the time, the average family earned less than £20 per year, which meant the bulk of the population went their whole lives without ever seeing a banknote.

Today, £50 notes remain rarely seen in the wild. While they are no longer the exclusive preserve of the wealthy, they are now a medium of exchange favoured only by drug dealers and the airport money changers who delight in ripping off foreign tourists.

When confronted by diminished purchasing power, we face three possible outcomes.

Sometimes, we simply can no longer afford the item in question at its new price. A point of fact, there is no decision to make. Acceptance, learning to live with disappointment, and moving on is the only productive course of action.

Other times, we are unwilling to afford the item at its new price. A subjective decision applied to discretionary spending, based upon some combination of pride and prioritisation. A worked example of the old cliché: “we can afford anything, but not everything”.

Then there is the third option. Swallowing our pride. Paying what it costs. Buying it anyway. A must for the necessities. A conscious decision for optional expenditure. Charitable giving. Entertainment. Gifts. Holidays. Investing. Saving. Voluntary pension contributions.

No amount of complaining, hand wringing, or living in the past will change those available options.

This can provide a useful lens through which to view changes to our financial circumstances.

Just over a decade ago, cryptocurrencies weren’t a thing. Then, suddenly, they were.

This time last year, the cryptocurrency Bitcoin had a market capitalisation of over USD$1.25tn. Yes, trillion as in 1,000,000,000,000. A number larger than the Gross Domestic Products of any but the 15 largest economies in the world.

Think about that for a second. The perceived value of Bitcoin was worth more than the entire annual economic output of the Netherlands or Indonesia. Economies housing and productively employing millions of people were perceived to be worth less than dubious digital assets that had been made up out of thin air.

A valuation fuelled by nothing more than the collective fervour of millions of recently converted true believers, and a much larger number of greater fools suffering from a fear of missing out. As with any religion, those believers had bought into a product purportedly solving an intangible problem that nobody proveably has. An investment philosophy based solely on hope.

Roll forward to today, and those Bitcoins are perceived to be worth just a quarter of their former value. Nearly one trillion dollars worth of hopes and dreams vanishing almost as quickly as their owner’s faith in the inevitability that blockchain changes everything. Still dubiously perceived to be worth more than the economic output of Finland or Columbia, but now perceived to be worth a lot less than a year ago.

But here is the thing. That perception of lost purchasing power, and being the poorer for it, feels the same whether caused by inflating prices or declining asset values. Either way, our money simply doesn’t go as far as it once did.

The mantra that long-term investors relentlessly beat is that you only lose money if you sell, so short-term price fluctuations are as irrelevant as they are noisy.

Unfortunately, for most of us, our mental accounting just doesn’t work that way.

We sing when we’re winning. When markets surge, we subconsciously adapt our plans and enlarge our dreams of what might be. Nicer holidays. Shinier cars. Better housing. An earlier retirement date.

Our tastes and outlook adjust almost instantly to those rising investment values, just as they do when we receive a pay rise at work. Our inflating expectations happen gradually, slowly enough that we seldom realise it is happening. Hedonic adaptation in all its glory.

Those long-term investors also know that Isaac Newton was onto something when he said, “what goes up must come down”. Many would ruefully add that those downward movements inevitably occur at the most inopportune of times, such as just before they wished to convert financial assets into material goods.

When the market turns downward, those dips tend to be sharp and unexpected. About as fun as a gut punch, the investing equivalent of the frog diving into boiling water. The impact measured emotively not in pounds and pennies, but in the things we can no longer afford to buy. A new car or kitchen renovation we can no longer afford, or a retirement date deferred.

These dips hurt because investing is not an outcome, it is a lifestyle enabler. The value of those investments is tangible, representing real-world purchasing power that has diminished.

The last time I checked, my portfolio had experienced a six-figure decline in value since the market last peaked. In the grand scheme of things this represented more of an inconvenient pothole than a yawning chasm of financial doom, yet it was enough to dispel the familiar warm fuzzy feelings that a rising market provides.

A rising market inflates the ego. Bestowing misplaced confidence in our investing prowess. Leading to mistaking good fortune for competence and control. We must be smart, because we are getting richer!

Over a similar time frame, I rebalanced a similar amount from productive investment assets to lifestyle-enabling expenditure.

This coincidental timing has provided an interesting parallel experiment.

One stream of activity saw my wealth reduce, through circumstances almost entirely beyond my control.

The second stream saw me reducing my wealth, through circumstances almost entirely within my control.

The interesting part was that they both felt the same. In terms of purchasing power, that single factor which governs how wealthy we feel, the cause of the decline made absolutely no difference.

Capricious market gods could have wreaked their vengeance upon my portfolio.

The mother of all spending splurges could have taken place. Perhaps buying an island. Riding in a spaceship. Paying for experimental medical treatments. Or thoroughly indulging a midlife crisis.

Or I could simply have built a bonfire of £50 notes and toasted marshmallows on Guy Fawkes night.

The loss of purchasing power would have felt exactly the same. The value of the funds lost, spent, or squandered was simply gone.

I may feel better about some causes than others, for example those traded for more.

More goods.

More memories.

Possibly more smiles.

But regardless of the cause, the difference between what I have and the lifestyle costs I wish to afford remains unchanged.

We are bombarded by news coverage about a cost of living “crisis”, where inflating needs and wants outpace any growth in wages experienced by large portions of the population. Those who are impacted find themselves needing to reduce spending, reign in expectations, and recalibrate what is possible. An uncomfortable adjustment.

Many will judge the crypto kiddies, who have seen their purchasing power reduce at an eye-watering rate. Fewer will similarly judge those holding stocks and bonds, for whom the drop was been less of a rollercoaster ride, but nonetheless a material change in their financial fortunes. Yet a decline in wealth is a decline in wealth, regardless of cause.

The main difference is that for the investors, the purchasing power lost is money they should be able to afford to lose. If not, it shouldn’t have been placed at risk in the first place. Those facing rising mortgage rates or wondering if they can afford to switch on their heating are confronted by more acute and immediate challenges however.

Feeling poorer, as their feeling of wealth diminishes.

Hopefully many will swiftly shift their perspective from focussing on the immediate symptom, diminished purchasing power, to addressing the underlying cause.

Inadequate wages in the current job. Leading to negotiating a pay rise, or finding a new employer. Possibly after retraining into a more lucrative role.

Housing that is expensive to finance, heat, and maintain. Leading to downsizing, geographic arbitrage, or improving the energy efficiency of the property.

Lifestyles that are better suited to the influencers people strive to emulate, rather than those that are commensurate with their incomes.

Which boils down the the secret of personal finance success: earn more, spend less, and invest the difference.

Get that right, and the feeling of wealth should soon follow.


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20 Comments

  1. A 14 November 2022

    The psychology is endlessly fascinating. For all the pain of this year I can’t help but feel good about new money going into my portfolio at the moment. That feeling should be a result of lower valuations or higher long term return expectations arising from the higher risk free rate but I think the reality is it’s simply the increased cash yield. Total (risk adjusted) return, clearly, is the rational objective and that nice nominal yield doesn’t cover half the latest CPI figure and yet it isn’t half seductive when you can see the portfolio’s yield catching up to your living expenses!

    • {in·deed·a·bly} 14 November 2022 — Post author

      Thanks A.

      You’re right, falling prices are great for those in the accumulation
      phase… providing they can afford to remain invested, and providing the markets recover within their time scales. For long term investors, this may be a reasonable bet. For those needing to access those funds sooner, it represents more of a throw of the dice.

      That gap between cashflows in and out is certainly the one to watch. Getting it right leads to finances on autopilot, sleeping well at night, and no longer needing to worry about money. Get it wrong, and financial stress ensues as we dig an ever deeper hole for ourselves until we summon up the courage to make the lifestyle changes needed to better align outflows to income.

  2. John Smith 14 November 2022

    It all depends of what wealth is for: yourself, or you + partner, or family + kids. Health (of mind first, then body) is the priority over wealth. Most important is how to access/use wealth in cases of riot, climate change, migration.

    The official 10%-15% inflation is bull-sheet. ex: my personal inflation was 50%-70%. But the point is that this 70% inflation is from a small basket (food, trips, fix bills) not global assets (because not often buying houses, cars). So my “capital depletion” was 4%/year, theoretically it will be zero in 25-30 years, just enough to see me over age 85. Statistically mortality will come fist.

    The thing is most FI(RE) folks think of perpetual capital, just skimming the profit /dividend, and hopping to dye with “wealth” to pass it as inheritance. But with an empty nest (kids gone) and you aging, then the needs are lower.

    The all point of FI, for me, was to keep-up (ish) with inflation (maintain the life style), not to beat it. Which is OK if you want to preserve the capital, but “wrong” if you wish to deplete all the capital.

    Some people fear high cost of living for old age (30+ years in future) but not fear faster extreme changes (war), wow! The feeling of wealth is having systematically health, food, shelter and sex. Aka cash flow, even consuming the wealth.

    • {in·deed·a·bly} 14 November 2022 — Post author

      Thanks John Smith, you raise some interesting points as always.

      You’re correct in highlighting there are two aspects to Financial Independence, the first is that cashflow delta between income (possibly manufactured via investment sales) and the second is how long that cashflow can be sustainably made to last.

      Live like a king, and risk running out of money before we run out of time?

      Live like a pauper, and risk becoming the richest corpse in the graveyard?

      Neither is a fantastic outcome! On balance I’d rather the latter than hitting the former at a point in life where I was too old to do anything about it. That said, isn’t that one of the unspoken reasons that most of us have children, to look after us in our dotage!?!

      It all comes back to risk versus reward decision making, and remembering that most things happening on the nightly news were “unimaginable” to many of the people now experiencing them. Invasion in Ukraine. Economic collapse in Lebanon. Rampant inflation in Turkey. Institutionalised systemic stupidity in Britain’s governance. The list is unfortunately endless.

  3. Impersonal Finances 15 November 2022

    Earn more, spend less, invest the difference. It really is that easy. Why do we make it so complicated!?

    What helps, at least for me in a high cost of living area, is to visit smaller towns or parts of the country that are generally more affordable. Then I’m asking if they’re joking because the prices are so low compared to what I’m used to the in San Francisco Bay Area. Makes it feel like I’m reversing inflation every once in a while!

    • John Smith 15 November 2022

      “Earn more, spend less, invest the difference. It really is that easy.”? No! (Tell this to under siege Ukrainians). Hm, I does not work for most of people.

      Earn more? It is limited by IQ, skills/education, health, network, age.
      Spend less? It is limited by a hard threshold minimum, under it is sickness risk (cold, hungry, anxiety).
      Invest the (possible) difference? It depends of time range, expected returns, but mostly of risk appetite. [You really know your stomach agency only after you lose important capital].

      I vote for FI, and for financial education at crude age. But I think wealth without mindset (compassion, moderation, humble) is not good. Or else, a critical mass of less-fortunate people will rise against it (and governments will take action to please the crowd).

      • {in·deed·a·bly} 15 November 2022 — Post author

        I don’t think the equation is any different, there is just a longer road to travel.

        Migrants, like you and I both, started in one place and decided the grass was greener someplace else. Many of our friends and family remained at home, doing what they had always done, following the simpler option even if it wasn’t easy.

        Achieving the desired lifestyle, including safety and healthcare and nutrition, required first relocating from somewhere it wasn’t possible (or at least very difficult) to somewhere where it was possible (or at least more likely).

        Sometimes that journey involves multiple generations before the end goal is realised, perhaps financial independence being a realistic option for children or grandchildren.

        But one thing is pretty certain, it is unlikely to happen had we stayed living in Kherson or Beirut or Tehran or Caracas or the Sahel. Take your pick from the myriad of places where people are doing it tough.

        Which, at least in part, begins to explain why 2 million migrants tried to enter the US this year, or 40,000 have attempted to cross the English channel in small boats.

    • {in·deed·a·bly} 15 November 2022 — Post author

      Thanks Impersonal Finances.

      You’ve scaled up the visiting dollar stores or charity shops there! Not quite poverty tourism, but I see the appeal. Winning would be living in those lower cost locales most of the time and commuting to the Bay Area by exception. But again, if it were that easy, everyone would be doing it!

  4. MonkeysOnARock 17 November 2022

    Just a side note, but although I’m a fan of the boiling frog metaphor, it doesn’t seem to be true as a literal statement about how frogs behave.

    That doesn’t diminish the underlying point you’re making about the power of inertia and habit in shaping human behaviour – maybe we need to take some lessons from the frogs…

    • {in·deed·a·bly} 17 November 2022 — Post author

      Thanks MonkeysOnARock, very true.

      I think real frogs would hopefully hop away the moment they saw a human, the wise frogs anyway. Safest outcome for all concerned.

      The metaphor I was originally going to use was the unfortunate wage slave trading the best years of their life grinding away in a soulless unfulfilling job at the end of a senseless commute, performing a busywork role to pay off a mortgage of an overpriced home located in a high cost of living locale that it is within commuting distance of that same job. Versus somebody who sees through the game, avails themselves of geographic arbitrage and remote working, and then supports their family living somewhere enjoyable doing something they hopefully like doing.

      But then I decided that was too bleak and dystopian, so opted for torturing amphibians instead because hopefully no sane person would ever do that!

      • MonkeysOnaRock 18 November 2022

        Hah! Yes, that would have hit a bit too close to home for many readers I suspect (myself very much included). I do at least have the idea of other possibilities in my head and a spouse who gets it, which feels like a start.

        Speaking of which, I’ve had this quote from John Stuart Mill rattling round my brain recently; again, not a description of the world as most of us currently experience it (or perhaps ever have), but an aspiration all the same:

        “Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing.” – On Liberty

  5. pathways 19 November 2022

    The feeling of wealth is a great topic!
    I was living in Italy in 2002 when they changed from Lira to Euro. I must admit earning millions in Lira was great! I’ve not managed to accrue that in any other currency since.

    Adjusting to new wealth takes time, of course the canny renders all inflated their prices (items in the market at 1000 lire all became 1 Euro – sounds cheap now!).
    Because the of the change, there were no longer all the little coins like 50 lira or 100 lira. These were worth very little but were used by the older generation to put on the bar and get served. You didn’t need to do it but it was habitual. I saw a distraught Roman lady at the bar was searching in her purse for a coin of small enough value.

    I wonder if I will live to earn a million again?

    • {in·deed·a·bly} 19 November 2022 — Post author

      Thanks pathways. An experience like you described is a great way to see through the folly of worshiping magic numbers. I once wrote about what it was to be a “millionaire” as the term was originally defined. The equivalent feeling of wealth required more than £14,250,000 a couple of years ago. Today it would be a greater number still.

      Compare that to being a paper millionaire today in Lebanon at £553. Not quite the same feeling of wealth!

      I wonder if I will live to earn a million again?

      Have a million? Almost certainty, assuming your lifespan is in line with average life expectancy. Compounding housing values combined with compounding inflation makes the outcome a long term inevitability, likely within your lifetime. The fact that that magic number won’t be worth much is one we conveniently forget, much like the Roman pensioner you so vividly describe.

      Earn a million? Probably. The masters of the universe already do. Some C-suite execs too. Politicians, skilled IT geeks, management consultants, and corporate middle managers in the City already earn a quarter to half that amount each year. Eventually teachers will too, though by then cost of living increases will have negated the lustre of the magic number.

  6. pathways 19 November 2022

    My partner and I dream of being digital nomads. Well for 9 months of the year at most – don’t want to lose my UK tax status. Some sort of hybrid working pattern.
    We both work from home and my online clients live all over the world.
    Bali is nice. I could earn over £1 million Indonesian Rupiah in just 2 hours’ work. The cost of living is not too bad (10 million Rupiah a month could cover it). I wouldn’t need to work much to live a comfortable life.

    I’ve just planned it out:
    June to September in Bali
    October to March in Goa
    March to June in UK

    Not sure I’d want to retire abroad though…My heart would long for British queuing and cloudy skies.

  7. fatbritabroad 19 November 2022

    Great Post. Similarly where your money is corresponds to ‘feeling wealthy’ . I used to have all my assets in pensions and my property. I was fairly well off (circa 700k net worth) but constantly felt poor and also fairly stressed.

    Now having built up a very decent isa investment and also a decent cash amount, I am far more relaxed and feel more ‘ wealthy’ than I did a few years ago.

    I guess I am in real terms but it’s mainly the fact that a decent proportion of the money is accessible.I could have built more wealth in pensions probably but being early 40s that was simply an arbitrary figure on an app. Not money I could use and spend if I so chose.

    • {in·deed·a·bly} 19 November 2022 — Post author

      Thanks FatBritAbroad. I think younger you was typically of many, what wealth they have is trapped in home equity or within age restricted pensions that will only become accessible in the distant future. The pension should merrily compound to help support them in their dotage, providing of course they don’t blow it having never previously learned how to manage and retain money!

      Well done for finding a balance that works for you. There is a lot to be said for an accessible cushion and tangible investment cashflows.

  8. Tim 20 November 2022

    Mmm. I think Australia really is bloody expensive. Not for everything of course (petrol, utilities, rent in some places for example) but for most things in comparison to most other places. The cost of everyday items in the supermarket is often double the price in the UK. I live here and don’t get conditioned to the high costs over time at all. They make my head spin every time I am confronted with them. Wages are relatively high here but they need to be. My strategy has always been to spend as much time abroad mainly in Southeast Asia and spend my money there and get the pleasure of seeing it go so much further much like Impersonal Finances trips from the Bay Area to the Heartlands.

    • {in·deed·a·bly} 20 November 2022 — Post author

      Thanks Tim.

      I guess a side effect of those regular trips to lower cost of living places serve to highlight the large price tag attached to choosing an expensive locale in which to reside. Makes sense, something that can’t be unseen once observed.

      That isn’t a bad thing though, providing we consciously accept it as a cost we willingly incur by choosing to live where we do. Living location is exactly that, a choice.

What say you?

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