Why investors are attracted to the number zero.
By Utpal Dholakia
How Much Is Too Much To Spend?
In my last post, I wrote about the downsides of eating $19 avocado toast. The post stemmed from the rather critical comments made by the Australian real-estate millionaire millennial Tim Gurner about his fellow peers. The gist of his comments was that because millennials today eat $19 avocado toast, drink $4 coffees, and travel to Europe every year, they are not able to save enough money to put a down payment on a house. His conclusion was that millennials are spending money in an undisciplined way.
Gurner's quote generated a lot of debate in social and traditional media, both supporting and protesting such a view of undisciplined spending. Specifically, whether you agreed with Tim Gurner's views or not depended on whether you thought paying $19 for avocado toast constituted undisciplined spending behavior.
In this post, I want to define the concept of undisciplined spending carefully. This will make it easier for us to judge whether spending $19 for avocado toast or $4 for a coffee is undisciplined spending. Careful definition is warranted because concepts like undisciplined spending tend to be interpreted in different ways by different people.
The four properties of undisciplined spending
The Oxford English dictionary defines "undisciplined" as "uncontrolled in behavior and manner." For spending specifically, when we explore what this really means, it boils down to four properties of spending behavior.
1. Overspending relative to income.
Any discussion of financial concepts has to account for the fact that different people make and have different amounts of money. As a result, overspending, like many other financial behaviors, is not an absolute concept. It depends on how much money you make. If you make a lot, your threshold to reach overspending will be much higher. If you don't make much, you will reach the threshold very quickly. In essence, overspending occurs when the individual's spending is disproportionately high relative to his or her income.
Considering the $19 avocado toast purchase through this "relative spending" lens, it is a perfectly reasonable expense for someone who has a high income. But for the average millennial who makes $35,000 per year, it will count as overspending for just one meal (beverage not included). The price of the toast is too high to pay for what millennials make.
2. Spending without a proper plan or budget.
A second property that classifies spending as undisciplined is when the consumer doesn't keep track of how much money they have to spend, or how much they are spending at the moment. When a particular expenditure is budgeted for in advance, it can be high relative to the individual's income and still be part of a disciplined approach to personal finances.
For example, the typical American spends around 12.5% of their income on food. This means that someone earning $35,000 would be able to budget approximately $365 for food every month, or about $4 per meal (assuming three meals per day). Again, within this budget, $19 for just for one plate of food is high, and therefore seems like an undisciplined act. (The only exception is if the individual has been eating ramen at home for a few meals to save up for an avocado toast splurge).
3. Paying a price that is far outside a product's range of reasonable prices.
Consumers have a range of reasonable prices for what a product is supposed to cost. For example, my range of reasonable prices for lunch is $2 (for a food truck taco) to $15 (for a sit-down lunch in a nice restaurant). Similarly, my range of reasonable prices for a sandwich is $3 to $8. And so on. When a product is priced below this range, it will be judged as cheap. It will be deemed as expensive if it is above the range. But if a product is far above the range of reasonable prices, it is seen as exorbitant and spending on it is seen as extravagant.
This is the case with avocado toast that costs $19. Most of us can buy an avocado for one or two dollars (or even less; in Houston, you can buy two jumbo avocados for a dollar at the moment). In this context, spending $19 for bread and avocado that would cost a small, small fraction to make at home, or even purchase in a cheaper restaurant, simply appears unwise.
In some sense, this property of buying an exorbitantly priced product is the most prominent and visible property of undisciplined spending. Even high income levels are not immune. For example, when it was reported that high-income-earning mega-celebrities Kanye West and Kim Kardashian spend $500 to rent and watch new-release movies in their home theater, it generated widespread mockery.
4. Showing a repeated pattern of these three behaviors.
Each of the three behaviors, performed once in a blue moon by themselves, would still raise questions about whether the person's spending is really undisciplined. Like this coffee enthusiast who bought a $47 mug of coffee from Starbucks, I am sure we can all think of times when we spent money foolishly or made really bad spending decisions.
However, it is when the three behaviors, either individually or together, are performed repeatedly, and when they form a pattern or even a habit that we have a discipline issue. That is when the person's spending is truly undisciplined and it usually leads to adverse consequences for the individual.
There you have it: A road-map for what constitutes undisciplined spending. Undisciplined spending is a repeated, even habitual pattern of three negative spending behaviors: (1) overspending relative to one's income, (2) spending without prior planning or budgeting, and (3) paying far more for a product than is reasonable.
Utpal Dholakia is the George R. Brown Professor of Marketing at Jones Graduate School of Business at Rice University.