A Little Luxury in Tough Times: The Lipstick Effect Explained

Life's journey can be an unpredictable ride, filled with highs and lows, and the economy (and our money!) is no different. Thanks to rising interest rates, inflation and the general increase in living costs, financial storms brew across Australian households and tightening personal spending has become a necessity for many of us. But there's a fascinating phenomenon that emerges amidst the frugality – the "Lipstick Effect”.

While this concept might be new to you, it was first observed during the Great Depression and has reappeared in more recent economic downturns, such as the recessions of the early 1980s, early 1990s, and 2000s. So, it’s no surprise that we see this trend appear again now.

Over the twelve months leading up to the June 2023 quarter, the Australian Bureau of Statistics (ABS) reported that the Living Cost Indexes (LCIs), designed to measure the price change of goods and services and the impact this has on living expenses across different households, all rose by between 6.3% and 9.6%. While the Wage Price Index (WPI) is reported to have risen by 3.7% during the same period, this increase hasn’t been felt by many industries and, more importantly, many households.

So what is the lipstick effect?

You’d be forgiven at this point for assuming the Lipstick Effect means you will be seeing a wave of bright lipstick-wearing individuals as we continue in tough financial times. And while that may have been true in the past, the essence of the Lipstick Effect goes far beyond mere cosmetic choices.

The Lipstick Effect's origins can be traced to Professor Juliet Schor's insightful research in economics and sociology. In her 1998 book "The Overspent American,"  she identified a remarkable and consistent human behaviour during periods of financial constraints. She observed that when resources were scarce, women were indulging in luxury lipsticks and finding small pleasures amidst economic adversity. The theory behind it is that while consumers might cut back on larger discretionary purchases, they still allow themselves small luxuries that offer a psychological boost.

While the cost of living has increased, the Australian Bureau of Statistics (ABS) reported more specifically on an overall increase in retail sales by 2.3% in June 2023, compared with the same month in 2022. Interestingly, during that 12 month period, we saw 11 interest rate rises by the Reserve Bank of Australia. But again, this isn't new. During the Global Financial Crisis (GFC) of 2008, L’Oreal, one of the world's largest global cosmetic companies, recorded an increase of 3.1% in sales in previous years.

Forgetting lipstick for a minute, at its core, the Lipstick Effect is about indulging in small luxuries that lift our spirits without causing a dent in our wallets. While major expenses, like that trip to Greece with your girlfriends, might need to be postponed, there's something irresistible about treating ourselves to a little lux once in a while.  These treats offer an escape from the stress of everyday life, the grind of frugality, and can brighten even the gloomiest of days while not breaking the bank.

What makes the Lipstick Effect truly captivating is its universality. It's not limited by age, background, or circumstance. Whether you're a university student navigating through finals week, a professional juggling work and family responsibilities, or a nervous retiree facing uncertain economic times, the allure of a little joy in our lives remains.

How do we responsibly maintain a touch of guilt-free luxury in our lives?

Like anything, discipline is key to ensuring your budget remains unscathed, and this requires strong financial groundwork. So before you head off to treat yourself because the Lipstick Effect theory said you could, make sure you have these smart money moves in place:

* Cashflow: Have a comprehensive budget that outlines your income, essential expenses (like housing, utilities, groceries, and day to day transport), and other financial obligations.

*Expenses: Identify your essential vs. discretionary spending and clearly distinguish between the two. You need to ensure that your essential needs are covered before splurging on non essentials. 

* Emergency fund: Maintaining an emergency fund, even if it’s $1,000, can help fund your unplanned expenses (think emergency home or car repairs) and means you don't need to get into debt to cover a crisis. 

*Debt management: Have a plan to manage any existing debts you have (like credit cards and personal loans) with the goal of paying off high-interest debts to reduce your financial commitments. 

With these foundations in place, you’re now free to enjoy life’s little luxuries without guilt or fear of overspending. This could include:

*Selecting miniature versions of your favourtie perfume or cosmetics to enjoy on special occasions;

*Spacing out your indulgences, like your 6 weekly salon appointment or regular massages, so you can still enjoy them, just a little less often; 

*Opting for DIY alternatives like a home mani/pedi, face mask or brunch date; or

*Cut back on other spending areas or cut out some discretionary spending altogether to prioritise high value indulgences like Taylor Swift tickets, a weekend away, or that girls trip to Greece.

So, the next time you find yourself in challenging times, remember it's important to strike a balance between treating yourself, and being financially responsible. Money should be used as a tool to create a life you love, so by setting yourself solid financial foundations, you pave the way to financial security, peace of mind, and the freedom to enjoy your money along the way.