How Evaluating Other People’s Money Habits Can Affect Your Own
You know you do n’t have to keep up with the Joneses, but there is a downside to even judging their habits. As personal finance expert Carl Richards explains, making assumptions about how other people save, spend, or make money can negatively affect our own financial decisions.
James Dusenberry, an economist and consumer researcher, called this the relative income hypothesis . It is our tendency to use other people as a guide for our own decisions and attitudes towards spending and saving money. Richards explains it this way:
According to Mr. Dusenberry, people tend to save less “because the higher costs of others fuel aspirations that they find it difficult to satisfy.” He also argued that “the high standards previously enjoyed by the well-to-do family … constitute a frame of reference that makes it difficult to cut back.”
Think about it for a second. We base our decisions about how we spend our money on how we think our income relates to those around us and to what we have spent in the past. But until our neighbors have submitted their tax returns, we do not know their real income. Our financial decisions can easily be completely fictional.
I’m guilty. For years, I have been saving for retirement based on what I thought my friends were saving . And since I assumed they weren’t saving anything, I didn’t save as much as I should have. Rather than using my own goals as a guide, I used my assumptions about their saving habits as a guide. Richards puts it this way:
… that we have a habit of not only telling ourselves fictions about the people around us based on our appearance, we also allow these stories to tell how we spend our money.
Like many money problems, this is a tricky habit that you might not even learn. Just knowing this can go a long way, but Richards suggests a few additional steps to avoid this in the full post at the link below.
Ignore Fiction – Stop Wasting Money on Stories | Behavior gap
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