We Canadians regard ourselves as a prudent, frugal people. We believe in balanced budgets (sort of), stable banks and personal responsibility. We are moderate in all things, especially our consumption. We are not like the foolish Americans, who blow their brains out on mega-mansions, TVs the size of football fields and SUVs that look like tanks. Unlike them, we live modestly and within our means.
Or so we think. In fact, we're in hock up to our eyeballs. For every dollar we make in personal disposable income, we owe $1.53. That's worse than both the Americans and the British. We've been borrowing more than we earn for a decade. This week, Bank of Canada Governor Mark Carney called household finances "our greatest domestic risk."
David Chilton knows the truth about our spending habits. He's the author of two stunningly successful books, The Wealthy Barber and The Wealthy Barber Returns. I had lunch with him the other day. "We're literally wired to spend," he told me. "We define ourselves by our stuff."
Mr. Chilton, who must be a millionaire by now, is a man of modest appetites. His house is 1,300 square feet. At lunch, I order two courses but he only orders one. I have a glass of Pinot Grigio but he has a glass of tap water. He doesn't drink.
One of our biggest problems, he says, is that so many of us make our borrowing decisions first. That's why our savings are so low. "We decide we're going to buy such-and-such a house, then think about the savings afterward."
I dimly remember a time when borrowing wasn't easy. To buy stuff, you had to save up for it ahead of time. If you saw a furniture set you wanted, or a prom dress, you could buy it on layaway. The store would lay away the dress for you until, bit by bit, you'd paid for it in full. Layaway plans disappeared about the same time as girdles did, and society relaxed. Suddenly, it was a whole lot easier to say yes.
At 22, when I got my first credit card, I treated it like a stick of dynamite. I feared that if I didn't pay off my balance every month, it might explode and I would go to hell. This Calvinistic approach to debt, which my husband shares, has served us well.
In other ways, I am a typical consumer, which means that I now take for granted luxuries I could never have imagined then. Consider my first apartment. It consisted of two rooms on the third floor of a decrepit house that must now be worth a fortune. The closet had been converted into a tiny kitchen. The stove had two burners and an oven, but you couldn't turn them on all at once or else you'd set the house on fire. The cramped three-piece bathroom, which I shared with an entire family, was downstairs. A few years later, I bought my first car, which I had to start by rolling it downhill. But that was more or less the way everybody lived, so I thought nothing of it.
Now I live in a fancy condo. The cat has a bathroom of his own. Our kitchen appliances, made of stainless steel, have endless features. They cost more than my first house did. Do I need them? Of course not. I can't even figure out how they work. But everybody else has them, so I have them, too.
Being middle class is a moving target. Yesterday's luxuries quickly become today's necessities. And most people aspire to live like the people who are slightly better off than they are. The economist Robert Frank calls this process the "expenditure cascade," although he could have called it status emulation. It starts when rich people start to get granite countertops. Then upper-middle-class people start to get them. Then, one day, you look at your crummy laminated countertops and realize that they've got to go. A hundred thousand dollars later, you have a brand-new kitchen, by which time the rich people have moved on to limestone, slate or marble.
"All consumption norms are local," writes Mr. Frank. "… The important practical point is that when the rich build bigger, they shift the frame of reference that shaped the demands of the near rich, who travel in the same social circles … and so on, all the way down." This helps explain why granite countertops are the norm today, and why houses are 50 per cent bigger than they were 30 years ago. It also explains why your average Wall Street investment banker feels deprived if he pulls down less than $10-million a year.
David Chilton has some simple advice concerning status emulation. Always save before you borrow. Be happy with laminate. He is.
Some people are overextended because they've run into hard times. But Mr. Chilton has seen plenty of high-income people in their 40s and 50s who've scarcely saved a dime. These people have never experienced a time – such as the 1970s and early 80s – when recessions and economic uncertainty were facts of life. "They have no memory of the bad times," he says. "So they trick themselves into thinking it can't happen to them." Low, low interest rates are a problem, too. Cheap credit is like crack cocaine – seductive, dangerous and highly addictive. And there's a pusher on every street corner.
"So many people equate consumption with happiness," says Mr. Chilton, as he settles the (extremely modest) lunch bill. "But consumption doesn't bring you happiness. Experiences bring you happiness."
He's right. And stainless steel appliances just bring you fingerprints.