As the world opens up after the global pandemic, some people become euphoric and buy luxury items that become a symbol of freedom.
Are you aware that Lamborghinis are almost sold out for the year? Six months into the year, 2021 has become the luxury car brand’s second-best year ever, even though the outside world has been closed for a few months.
“Revenge spending” describes the phenomenon when people come out of closure and spend more money than they did before the closure.
The consumption may be driven by a bitterness over having been forced to sit isolated at home and having to eat your own food day after day. It may also be driven by a bitterness over all the things – like travels and parties – that were canceled.
Did you have a thought (or maybe even a plan) that you would throw a huge party or book a long luxury trip when it was all over?
How do you navigate the euphoria of returning to normal without making financial harakiri?
Here are five rules you can follow:
1. Avoid consumer debt and overdrafts
Avoid building up consumer debt because you feel excited at the moment.
Do you know the rules of compounding? This is when your money makes money for you, and begins to grow exponentially because with time you’ll have more money working for you, as you reinvest the return.
Debt is the exact opposite of that. It makes your money work against you because you are paying for your debt. The higher the interest rate, the worse the problem. And the rule of compounding works the other way too: money will work faster and faster against you.
The worst debt is consumer debt and overdrafts on credit cards. It should be a rule of thumb for you to avoid it at all cost.
2. Never spend more than you earn
Make it a principle that you always spend less than your current income, so you can put money aside for savings and investments.
Now, we’ve all been through a long lockdown, and we have missed the world. I’ll be the last person to tell you to stay at home so you’ll save money.
I’m not going to deprive myself further.
I want to enjoy traveling, going out to amusement parks, aquariums and zoos with my kids. I want to go out for dinner with my girlfriends, and I want to visit the people I care about.
Instead of looking at your monthly income and expenses, I would look at the annual income and expenses and make a plan.
In this way, you can have some summer months where you spend more than your current monthly income (but not your yearly).
3. Review your priorities
Perhaps the closure has opened up a new way of life.
Maybe it’s time to adjust consumption accordingly.
Maybe you’ve realized that you don’t miss going out for drinks with your colleagues. Maybe you’ve found that what you really missed was dinner parties at home. Or maybe it’s the other way around. Doesn’t matter. The important thing is to review it.
The shutdown may have changed your lifestyle permanently. There’s no reason to fall back into old habits if you haven’t really missed it.
Reflect on what you want back in your life and what you can live without before you say yes to all the invitations coming in.
Personally, I prioritize experiences over material things. I love dinners with friends, small parties, travel and adventures with my kids.
But I don’t preach zero consumption. Instead, I advocate consumption with consideration and maybe moderation.
Buy what you really love. Buy quality that will last – and stay away from the rest.
4. Make a Budget
It helps to set a budget for how much money you can and will revenge spend.
This isn’t the time to deny yourself a dinner with friends because you want to save money for investing. Not on top of lockdowns. It can be downright unhealthy and depressing to isolate yourself further.
You’ve probably saved some money during the shutdown as vacations and parties were cancelled.
Make a date with yourself, sit down and calculate what you have saved. You can feel free to spend some of that money now.
I always try to look for compromises in life. In this context, it means finding a way to spend, have fun and also set money aside for investing.
Of course, you’re allowed to pamper yourself, but you need to set some limits for how it may affect you financially.
5. Make Your Money Work For You
If anything, the lockdowns have really illustrated how important it is to have a financially strong base.
It’s important that you make sure that your money makes money for you while you sleep – or for some reasons can’t work.
It’s honestly easier to enjoy life and consume “for fun” (or revenge) if you have the confidence that part of your finances is working for you in the background and moving you in the right direction.
If you want to learn about investing, you can download my investment book Free Yourself here.