ANALYSIS: Even with house prices coming down, it is still challenging for first home buyers to save enough money for a home deposit. If you don't meet the First Home Loan criteria, you will likely need at least 10% of the purchase price. In Auckland, this will almost certainly mean at least a deposit of more than $70,000, often much more.
Most people know the budgeting struggle of long-term gains versus short-term rewards. You could save for the next seven years and buy yourself a house, or you could upgrade your TV right now. One requires long-term commitment, whereas the other gives you instant gratification. This is part of what makes saving so hard and why KiwiSaver is such a good scheme for Kiwis - the KiwiSaver money is gone into your retirement or house savings before it even hits your bank account.
But for those who are working hard to save additional money above and beyond their KiwiSaver contributions, a lesser known hurdle they may be hitting is the "Diderot Effect". Essentially this effect involves the cascading costs of buying just one nice thing.
Here's an example of the Diderot effect. You are saving $500 weekly for a deposit and decide to treat yourself and buy some nice new exercise sneakers to run in. Suddenly your shoes are newer and shinier than your running shorts, so you buy some new shorts to match your shoes. Now your running tops look old. The cost of treating yourself to a new pair of shoes has cascaded into a new exercise wardrobe.
Start your property search
The more you think about this, the more often you will see it pop up in daily life. You buy a new rug only to find that it makes your couch look old. You buy an expensive pasta sauce only to find that it doesn't taste as good without homemade pasta.
In fact, it's almost impossible to treat yourself to something without this effect coming into play. This is partly because very few things, even cheap things, are ever used in isolation from anything else. An excellent brand of coffee will always be in an old mug; buying the slightly more expensive apples for an extra dollar may show how blunt your kitchen knives have become.
Mortgage Lab founder Rupert Gough: "Most people know the budgeting struggle of long-term gains versus short-term rewards." Photo / Fiona Goodall
The trick to avoiding the Diderot effect when budgeting is treating yourself with a group of cheaper items rather than focusing on one specific thing. You might, for example, buy a nice brand of ice cream with waffle cones and some nice sauce for dessert. The additional cost is another $10 per week but lowers the risk of cascading costs. In other words, the ice cream isn't your treat; the ice cream eating experience is the treat.
The second trick is to understand and, importantly, recognise the Diderot effect and fight against it daily. Even in the simple ice cream example above, you could start to wonder if you need new dessert bowls or to upgrade your ice cream scoop. Be aware of the Diderot effect, and make sure your one-off treat budget isn't creeping out of control.
When you're on a budget, like on a diet, it's essential to reward yourself with small treats, so you don't feel like you're constantly missing out. But the Diderot effect can cause your budget to slowly get out of control, so set boundaries on what you reward yourself with and don't let it get out of control.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
