Financial trouble doesn’t come from earning too little.
It comes from comparing too much.
We had a change of management recently. But one thing doesn’t change – the big cars and the big houses that they own.
I wonder if they really enjoy their possessions, or they bought it because their peers all did.
Comparing upwards is the default
In psychology, there are upwards comparisons and downward comparisons. In upwards comparisons, we compare ourselves to people who are doing better than us. In downwards comparisons, we compare ourselves to those doing worse.
Guess which one we normally do?
We compare ourselves to those who made a recent large purchase. This comes in the form of a new car, new house or new investment.
We don’t compare ourselves with the average household, with their average struggles and their average burdens.
We don’t see the rest of the iceberg
Professor Abigail Sussman says that we compare ourselves to what people have, not what it cost to get them there.
When we see their new car, we think about how nice it will be to drive it, not about making the monthly payments for the car loan.
When we see their new house, we think about how nice it will be to live in it, not about the stress of paying off the mortgage.
When we hear about their travels, we think about how nice the holiday is, not about the time effort to plan and pay for it.
Lifestyle inflation is a huge risk
A luxury once enjoyed becomes a necessity.
And we often tell ourselves that we’ve worked hard for it, so we deserve it.
All of this is true.
But it puts a strain on our finances – a strain that our future selves will have to bear.
It’s like eating delicious ice cream. Future you will be the one that puts on the pounds, or the one that puts in the effort to sweat it off.
And it creeps up on us so slowly that we might not realise it.
The final payback is delayed retirement
With greater spending comes a greater need for a retirement nest egg.
People don’t usually realise that cutting spending is just as impactful as earning more.
Of course, this doesn’t mean we should live in monk-like frugality.
Instead, it means assessing the trade-off with a clear-eyed view of what it will cost us.
Often, this means retiring a year or two later.
Now, is that new car worth it? Or would you rather retire 3 years earlier?
This is the question you should be asking.
Always remember that our life is our own journey, not a race against others.
I hope you will choose wisely.
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