Luxury goods are sometimes called the finer things in life. Think about those fancy sports cars, watches, handbags, shoes, and jewelry that can cost a mint. Those beautiful objects of desire are not at all necessary to support basic human needs, but they may make life a lot more enjoyable.
Demand for luxury goods is typically driven by perceived value (that is, being a status symbol) as much as product quality and design. Brand awareness is an important aspect of the luxury market. These high-end items from exclusive brands are expensive, putting them out of reach of many consumers, which can add to their allure.
If you’re simply curious about luxury goods or contemplating buying some, read on to understand what makes them special, the pros and cons of purchasing high-end products, and how to afford a luxury item.
Key Points
• Luxury items are desirable, exclusive, and typically expensive.
• Saving and budgeting strategies can help you afford luxury goods without incurring debt.
• Renting or buying pre-owned luxury items are cost-effective alternatives to owning new ones.
• Luxury goods can offer status, quality, and better resale value, but also come with high costs and potential depreciation.
• The demand for luxury goods is driven by perceived value, brand awareness, and the desire to display wealth and status.
What Makes a Luxury Good “Luxury”?
Luxury items are defined by their exclusivity and higher cost, which limits access to them. To put it simply, they are expensive! Once a luxury item becomes more readily available at a lower price point, it may lose its appeal, and demand wanes.
Different cultures around the globe have varying tastes about what luxury goods are. That is, what is considered a highly desirable luxury good in one society may not be as valuable in another. However, there are brands that have become international icons of living well (more on that below).
Luxury goods are linked to the economic term “conspicuous consumption,” which occurs when consumers buy higher priced goods to display their wealth and class status. People who want to publicly communicate their economic and social status may buy luxury goods that signal that message. Purchasing luxury goods is typically tied to a consumer having more expendable cash. That said, some people spend well beyond their means in order to own a luxury item.
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Examples of Luxury Items
What exactly is a luxury item? There are lots of examples in the nearly $300 billion industry. Luxury products have traditionally included aspirational items, such as:
• Yachts
• Top-of-the-line cars
• Fine and antique furniture
• Art
• Furs
• Watches
• Jewelry
• Designer clothing and handbags
• Wine
• State-of-the-art electronics
• Cosmetics and fragrances
You’ll likely see some familiar names in the luxury goods market. Many companies have established themselves as luxury brands with their exclusive products.
Some of the top, recognizable luxury brands include:
• Porsche
• Ferrari
• Chanel
• Hermès
• Balenciaga
• Alexander McQueen
• Louis Vuitton
• Burberry
• Gucci
• Cartier
• Tiffany & Co.
• Rolex
• Dior
• Prada
• Bulgari
When you see those names when shopping, you probably are looking at what are known as luxury items.
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Pros of Purchasing Luxury Goods
If you’re looking at purchasing a luxury item for the first time, there’s more to it than its price tag. Purchasing a luxury item can bring other benefits. These can include:
• Status
• Better quality products
• Better service at retail locations or service centers
• Better resale value than other goods
• Strong value appreciation in some goods (such as jewelry or art)
• Exclusivity
Cons of Purchasing Luxury Goods
Conversely, purchasing a luxury item isn’t always a good idea. Some of the downsides to purchasing luxury goods include:
• High cost
• Money used to purchase a luxury good could be used elsewhere
• Can lead to more conspicuous consumption
• Depreciation on certain goods may be high
• Can undermine confidence; some people wind up feeling inauthentic (as if they are “faking it”) after spending a lot of cash on luxury items
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Luxury Goods vs Normal Goods: What’s the Difference?
Buying normal goods means you are buying items whose cost increases at the same rate as your income increases. If you, say, shopped for clothing at garage sales to save money on your wardrobe at the beginning of your career, and now you spend money on clothing at a traditional retailer, your consumption increased to the higher-priced clothing at the same rate as your income increased. These goods are within a reasonable range given your earning power.
Compare that with what is a luxury good. In this case, the cost of consumption increases, but generally not at the same rate as income. The price tag for a luxury item is often exponentially more than could be afforded by one’s salary raises.
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Luxury Goods vs Inferior Goods: What’s the Difference?
According to the principles taught in economics class, an inferior good is one whose consumption decreases as a consumer’s income increases. If you ate ramen in college, for example, but no longer consume them now that you’re making more money in your career, that pack of noodles is an example of an inferior good. Your consumption of it decreased as you made more money.
Typically, with luxury goods, consumption increases with a higher income; with an inferior good, consumption decreases with a higher income.
Tips for Affording a Luxury Item
Saving up for a luxury item and then paying in cash can be a good strategy. Whether the object you’re craving is a handbag or a sports car, you won’t feel guilty about spending money when you’ve stashed the money away for it and can pay without creating credit card debt. If you automate your savings for the luxury item, you may well reach your goal without too much effort.
Saving for a Luxury Good
Saving up for a luxury item and then paying in cash can be a good strategy. Whether the object you’re craving is a handbag or a sports car, you won’t feel guilty about spending money when you’ve stashed the money away for it and can pay without creating credit card debt. If you automate your savings for the luxury item, you may well reach your goal without too much effort.
Waiting for Sales
Even luxury goods can go on sale, though perhaps less often than with lower-priced items. Even if you miss their sales, you may be able to find some premium items at discounted prices at outlet stores.
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Avoiding Trends
When saving for that luxury item, it can be wise to avoid trendy luxury products. Those probably won’t stay in style for long, and if you’re making a major purchase, it can be smarter to spend your money on things that will last.
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Renting Luxury Items Over Buying
You might want to consider renting a luxury item rather than paying loads of money to own it. For instance, you could lease a luxury car for a while and see if you truly love it. And there are many businesses that rent designer clothing and handbags, such as Rent The Runway and Bag Borrow or Steal. That can give you a taste of luxury at a more affordable price point.
Lowering Your Other Expenses
If you’re really set on affording a luxury item, see where else you can cut back on spending. Knowing you’d rather own a luxury car than go out every weekend can help you feel more motivated to cut back on dining and entertainment expenses.
Buying Pre-Owned
Another way to afford luxury items is to buy ones that have been pre-owned. From BMWs to Louis Vuitton handbags, there’s a large marketplace for gently used posh goods. How to afford luxury items can be a matter of being the second owner rather than the first of the item you desire.
The Takeaway
A luxury good is a product that is generally costly. It may also be of superior quality and retain its value better than non-luxury goods. Owning one can also be an ego boost and a source of pride.
Saving to obtain luxury goods can help you cultivate good financial habits, which in turn can help you reach other goals and build wealth.
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FAQ
Why do people buy luxury goods?
Luxury goods can signal exclusivity, wealth, and a higher social status. People who buy luxury goods typically want to communicate this to themselves and others. Also, luxury items are often very well made and can last for many years.
Do luxury goods have high resale value?
Luxury goods, especially when in excellent condition, can have a high resale value. Some brands, such as Chanel and Hermès, have a better resale value than others. Jewelry by well-known brands (like Tiffany & Co.) tend to hold their value well too.
Does luxury always mean expensive?
A luxury item is typically highly desirable and very exclusive, which is usually tied to the amount of money it costs to obtain it. However, many luxury brands produce cheaper alternatives of their signature products to sell to more consumers at a more affordable cost. The Coach outlet stores are one example that luxury items don’t always have to be expensive, and the Mercedes CLA Coupe starts at about $44,400.
Photo credit: iStock/MoustacheGirl
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