Not to be one of those people who proclaims the musings of their child as sage wisdom, but here I go. Every time I split a cookie for my kids, my daughter’s first question is whether her half is the bigger one. (For the math inclined: yes, one half is always bigger. Years of practice have not improved my cookie surgery.) She’s been handed a cookie, and somehow the fun is already over. Grown-ups do the same thing with their spending.
Social comparisons are not new. If you buy a $300,000 house, your friend who bought the $400,000 house seems so much better off. This cycle does not end. A $500,000 house will look nicer than the $400,000 one. A million dollar house will look even nicer. And the best catch, the million dollar house on the beach will look nice until it’s hot out and then that million dollar house in the mountains will look even better! Until it gets cold, that is.
There is no end solution that fully checks every box, and by nature our preferences will shift and settle and we will continue to re-establish baselines¹ of our contentment. Novelty, for that reason, is always going to be attractive. What does any of this have to do with financial advice, you may ask. Keeping up with the Joneses as a behavioral finance topic is extremely relevant, I believe now more than ever.
James Duesenberry², Harvard professor and Economist, created the relative income hypothesis in 1949 as a result of studying spending trends of individuals. Prior to his research, the common thought was that an individual’s level of consumption was purely independent and not at all relative to other’s spending. Essentially, the amount I consume is not dependent on what anyone around me consumes. Duesenberry argued that the opposite was true. For example, if your friends and neighbors are spending more, you are also likely to spend more. Another conclusion of his work was that the weighted average time spent with a peer group would correlate to spending. By being around those who spend more and are materialistic, it would also lead to more spending.
Now, I can’t say Friends and Neighbors without bringing up the Apple series by the same name. I will not derail the entire post by talking about Coop and what a great show it is, but there is a natural tie in for how Coop starts with honest intentions before lifestyle creep and the pressure to fit in societally take hold of him and his family. While obviously fictional, the show does a good job in highlighting how quickly things move from “I have finally reached a place of financial security” to “if I just had a little bit more it would be enough”. Spoiler, “enough” is always a little bit further away.
Central to the relative income hypothesis is the idea that the happiness one derives from consumption depends on what and how much one consumes relative to what and how much others consume. That is because people are concerned about their status relative to others. While drawing the parallel and criticizing social media is probably overkill at this point, I will still do it.
When your social circle is limited to your immediate physical location maybe this is not itself a problem. But, when your social circle is expanded to anyone with a social media presence and whose sole job is ‘influencing’ and selling you on their lifestyle, it can quickly become one.
I previously wrote about the finfluencer craze and social media’s impact on the financial planning profession. In a similar way, social media supercharges comparison. The ease with which you can extend your circle of peers to anyone with a social media account makes negative comparisons about your lifestyle and spending habits so easy. Social media turned comparison into a subscription. It renews automatically, and every scroll is another billing cycle.
Observing obscene spending habits and being influenced to think you should be spending in a similar fashion is easy. Our proximity to spending is based on our social circle that used to be based primarily on physical location. With the internet it is no longer limited by geography. By not being critical of our financial goals, it is extremely easy to be influenced to spend frivolously for no reason other than pressures to keep up with a perceived social circle.
One of the more famous studies³ on this topic, a 1978 paper by Brickman, Coates, and Janoff-Bulman, compared lottery winners with accident victims to determine overall happiness. The study concluded that, in general, lottery winners rated everyday pleasures lower than a control group, and accident victims rated them higher. Lottery winners quickly adjusted to their new normal of having more money, and happiness was as fleeting as their wealth.
A separate paper⁴ by Agarwal, Mikhed, and Scholnick studied Canadian lottery winners and their immediate neighbors, about 13 households per postal code. The bigger the win, the more the neighbors borrowed and the more likely they were to file for bankruptcy. Each additional C$1,000 in prize money raised bankruptcies among close neighbors by 2.4% over the next two years, and the neighbors who went under held more visible assets like houses and cars. In other words, the bigger the windfall next door, the more likely the rest of the street was to take on debt that in some cases even resulted in filing for bankruptcy.
I’m not immune. I’ve felt the pull of lifestyle creep and Instagram glamorizing (Instaglamorizing?) like everyone else. It’s hard to live within your means while watching other people “do more,” and hard to save while they spend. But spending habits are the part of your finances you control most, and they’re much easier to ratchet up than to bring back down when times get tough.
That’s why, at Gatewood, one of our central tenets is bringing purpose to wealth. A kitchen renovation so the whole family can fit around the table at the holidays is a very different goal from spending to keep up with the neighbors. A lake house to share vacations with friends or family can be worth every penny. A car you bought because your favorite influencer did? Probably not.
This post is not an indictment on social media or Instagram. It is, however, meant to spark thought at who you may actually be benchmarking your life against. Before modelling financial decisions based on influencers that finance their life through a black box, ask yourself if the potential decision would still matter a year from now. Psychologists call this hedonic adaptation: our mood returns to a stable baseline after both good and bad changes, which suggests purchases alone rarely produce lasting happiness.
This is where goals-based planning makes a difference. A concrete goal like retirement, your kids’ education, or a plan for charitable giving creates a fulfillment that outlasts any impulse driven by a desire to belong. I’ve seen it with clients who weren’t sure they were ready to retire, then realized their diligence and adherence to a plan meant they were.
Spending with purpose starts with knowing what matters most to you, not to the people on your feed. If you’d like a partner in putting your goals at the center of your plan, we’d love to talk. Schedule a conversation with a Gatewood advisor, and let’s figure out what “enough” looks like for you.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Gatewood Wealth Solutions and LPL Financial do not provide legal or tax advice or services.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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