Keeping up With the Jones Is Not Just Things, It’s Habits
Your neighbor has a fancy new car, and now you want it too: most of us are familiar with the concept of keeping up with the Jones. But it’s not just a matter of comparing materialism. We often compare our saving habits to those of other people, and it doesn’t make much sense.
For example, when I paid off my debt, I knew I should start saving more, but damn it, I didn’t want to. I wanted to spend and have been doing it for some time. I had a sweet 401 (k) match but saved a paltry amount on it. Instead, I bought things that I didn’t need. My reasoning? “Eh, I’ll probably save more than anyone else.”
First, it’s stupid: I had no idea how much my friends were saving. But more importantly, this is not the metric you should use to decide how much to save. We often compare our habits to those of other people, which doesn’t make much sense because you have different needs.
And here’s the interesting thing: even if your friends have great saving habits, comparison still doesn’t help. According to a study published by the National Bureau of Economic Research , we won’t be saving anymore anyway.
Yale University finance professor James Choi co-authored a study in which subjects were asked how much they wanted to save with a retirement plan. Before making a decision, they were given information about how much their colleagues are saving. In a Wall Street Journal article, Choi reported:
We entered the study believing that information about colleagues would increase savings, but we did not find conclusive evidence that this was the case. And for the subset of those who don’t save who we think would be most susceptible to peer influences – those who weren’t automatically 401 (k) enrolled – peer information actually discouraged them from joining the plan . Most of the people in this group did not mind saving; rather, they simply did not have time to join the plan. However, peer information reduced subsequent enrollment rates in this group by a third, from 9.9% to 6.3%.
Therefore, following the Jones habits, you always tend to save less, even if they are great at saving. There’s plenty to think about, and Choi discusses how his research supports this concept at the link below.
The Impact of Providing Information from Colleagues on Retirement Savings Decisions | NBER via Wall Street Journal