Not So Different

Let me tell you about the very rich. They are different from you and me.
-- F. Scott Fitzgerald

The current crisis has proven many apparent truisms wrong.

Among other things, we've learned that there are few, if any, industries, including health care and consumer staples, that are truly recession-proof.

We've seen how closely tied the rest of the world is -- up until now, at least -- to economic circumstances in the United States, despite the assertions of the decoupling-ists.

We've also discovered that, contrary to popular belief, the rich are not immune to the pressures of a broad-based economic downturn.

Indeed, in "How the Wealthy are Spending Their Money This Year," the Luxist blog reveals just how much the attitudes of those who still have the cash and those who don't have converged.

Last week, I sat down with representatives from American Express Publishing and Harrison Group to see a presentation and discuss a question which is on many of our minds: How are the wealthy reacting to the recession?

Well, to start with, more than half (53%) are worried they could run out of money. Dr. Jim Taylor, vice chairman of Harrison Group, and Cara David, senior vice president of corporate marketing and integrated media of American Express Publishing spent approximately an hour display charts that showed the results of countless hours spent crunching the first-quarter responses of 1,300 Americans with discretionary incomes over $100,000 (that means income after tax, mortgage, home maintenance, and child education costs are subtracted).

This year there are 120,000 fewer households that fit in that range. The number of households with a discretionary income over $500,000 went from approximately 118,000 to 92,000 -- the first drop since 1997.

Of these 1,300 moderately-to-very wealthy Americans, 70% believe that the recession will last longer than a year, and 35% think this could be a long term depression. 78% report that the crisis has affected their sense of financial security.

So how does the spending look? "Luxury is not dead, there's simply a filter on risk," says Taylor. 77% said they are buying fewer "big ticket items" this year -- so it's a safe bet that they're buying brands they trust. There seems to be a trend among the wealthy of pride in their willingness to not buy things. This goes beyond the usual chatter of talking about great bargains you got; people are actually feeling an increase in their self-esteem related to their ability to take control of their own lives. Believe it or not, spending less is making people happier. People checking the "Very Happy" box went from 58% last year to 66% this year -- women up 10%, men up 4%.

Perhaps less money means less going out to dinner, more time at home with the family -- and perhaps that's why more people (57% this year, 45% last year) are taking advice from their kids on what brands to buy. Studies show that kids prefer brands that "really work," and do research into performance and reliability. Again, this makes good sense for families who are buying fewer big ticket items. It's truly a buyer's market right now, because buyers are willing to wait; they'll wait to find out which brand or item is the best -- and 80% say they wait for an item to go on sale.

That doesn't mean they're not spending big, though. People are willing to pay a lot of money for bells and whistles right now. "The angel is in the details," as they say, and people are less likely to expect a discount on an item they perceive as having "high performance details." This can mean anything from TVs with exceptional sound systems to designer handbags with specially designed features.

Many of the luxury brands we know today, like Louis Vuitton, first "exploded" in America during The Great Depression. "People look to brands in times of trouble to protect them from risk," says Jim.

In the art market, buyers for an artist's best pieces are up, where as buyers for lesser works are down -- collectors take note: it's a good time to buy the ugly ones.

So how are the wealthy spending their money this year? Very carefully. People are being wary of risk and waiting to buy; they're even booking vacations closer to the wire to "get a good deal." Still, a high percentage of respondents agreed -- "A few luxuries are important in tough times."

Comments

[farang]

Thanks, good article. One can learn a lot about proper investing/spending habits during rough economic times from this.

Myself, I always look for bargains, yet not to the pont of buying inferior products.

Take your time, look around, and be ready to make a purchase when all the conditions you wish to find are present.

Of course, I've never had the luxury of having $500,000 in annual "discretionary income", so I am unsure I wouldn't splurge "a little bit" with that kind of moola. I have over $100,000, and found that just $5000 can take you to see places you would only dream about with less.

[dearieme]

Time is the greatest luxury.

[scottt]

Consumption is complicity .
Consumption 'american style' requires most often that the transaction enriches rotten bastards .
so unless you really need to make the transaction ,ya shouldnt.
The various profits attached to the transactions are taxes upon your ability to provide yourself security of the things ya need - a tax upon the short amount of time that you are allowed by nature to be alive (living not slaving ) - a tax on your body by adding unnecessary labors - a tax upon your ability to live in a more democratic environment ,cuz ya enrich the barrons and they use your money to bribe the policy whores to make it easier for them to monopolise more and tax your life more .
Instead of consuming their wares (seeing that they are evil) why not try to produce them yourselves , overproduce them until the 'profit motive' is dead and their monetary abilities to bribe the policy whores have diminished ?
In other words , If ya have to do without , do it out of
spite and righteous indignation .

[roger]

Let me tell you about the very rich. They are different from you and me.
-- F. Scott Fitzgerald Nothing is changed since his days
Sorry the very rich are very different from us

[h spencer]

Actually I have found that the amount of one's income is of less importance than one's actual cash flow. Cash flow is increased over and again, through having no obligations on your income. I went totally debt-free (zero outgoing cash obligations) over ten years ago, and the increase in my cash-flow has been amazing. When we owe money on credit type purchases, ie: mortgage, autos, furniture, appliances, credit cards, what we are doing is obligating our future earnings, thus reducing availability of growth in cash-flow. This may seem elementary to many readers, but it is the thing many many people can't seem to understand. It is true that few of us can buy a home without a mortgage, but must we buy a 300,000 or 400,000 dollar one? No way to short side pay that away in just a few years. Why not save up 25,000 for down payment, finance 75,000 for ten years, and short side pay it away? Few can buy a new car at 25,000 and up. Why not save thousands on a two to three year old, very nice vehicle, save up most of the cash for it, and have no obligated funds residing in a loan? A new car is a used car waiting to happen, and it happens at the signing of the purchase contract. The bottom line is when your cash flow is all yours, then you can buy almost whatever you want and forget the "loan".

[Millionaire Acts]

Nice article! With the current economic crisis, I do think that we really need to save and be frugal in spending our money. We must spend more on the needs and less on the wants.