Personal Finance: Don’t Try to “Keep Up With the Joneses”

In 2018, the Federal Reserve Bank of Philadelphia published a study titled Peers’ Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies. In the paper, the authors describe how individuals are more likely to go bankrupt when their neighbors win the lottery. While in some ways surprising, this dynamic reflects a well-known trope in personal finance: the dangers of trying to “Keep Up With the Joneses.”

Our savings and spending habits do not exist in a vacuum, and are influenced by all sorts of external pressures and desires. This is all the more reason why being intentional with your finances is absolutely essential.

What Does it Mean to “Keep Up With the Joneses”?

The odds are certainly stacked against you, but it is possible that you could win the lottery. This leads to that question so many dream about: how would you spend your first million?

All of a sudden, you will have the ability to purchase those big-ticket items you’ve always fantasized about. You can upgrade to a fancy car, take that once-in-a-lifetime trip around the world, and purchase all sorts of accessories and luxuries that were previously unattainable.

These purchases can be highly visible. Without necessarily meaning to, lottery winners are likely to flaunt their brand new lifestyles.

And, their neighbors notice.

The academics found that individuals living in close proximity to the lottery winners also began to increase their purchasing. Except, they did so without the requisite increase in earnings.

Interestingly, their main finding was that “the larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood.”

In other words, the size of the windfall also affected the rate of those spending themselves into bankruptcy. Individuals wanted to keep pace with their neighbors, even if they did not have the means to do so.

This phenomenon, of always comparing ourselves to our neighbors, is known as “Keeping Up with the Joneses.” We focus on the possessions and accomplishments of others, even at the expense of our own goals and aspirations.

So, how can we make sure that this “Keeping Up with the Joneses” effect does not happen to us?

What is the Importance of Budgeting?

Every individual and family has their own unique financial situation. No one formula is right for all, and each familial unit needs to figure out for themselves their spending needs and priorities.

This is where the wonders of budgeting come into play. There is no better way to match your income with expenses than by defining your finances in clear, unmistakable numbers.

There are a slew of different budgeting systems that you can use to design your financial planning. There are some that are high maintenance and require an intense amount of monitoring, while others offer a looser set of guidelines.

The common denominator connecting them all is balancing your needs, wants, and savings goals. There are very clear spending trade-offs inherent throughout this process, which a budget will help you to understand in stark terms. Individuals spend themselves into debt when they do not balance their incomes with their expenses.

Keep in mind that there is room in most budgets for some discretionary spending. That does not translate into going crazy with your purchases, but rather serves as a reminder that your choices need to match your capabilities.

How Do You Live Within Your Means?

The best way to ensure that you live within your means is to your match your expectations with your finances.

In other words, be realistic about what you can afford and avoid temptations that might lead you into spending beyond the contours of your budget.

It seems simple, but it is anything but. We live in a world where every conceivable purchase can be executed at the click of button, and we are constantly bombarded with the latest and greatest goods, deals, and offers.

Defining a plan will help you to stay within your financial boundaries, as will thinking about your long-term goals and your path to attaining them.

For instance, try not to focus on the latest version of an electronic gadget that your neighbor recently acquired. Instead, consider the down payment on the house you are saving up for, your ability to pay for your children’s college education, or the type of retirement that you desire.

If that does not work, then remind yourself of the dangers of spiraling into wealth-destroying debt, and the havoc that this will wreak on your family’s future. Credit card debt, which tends to compound daily, is a particularly nasty affliction.

At the end of the day, do not buy what you cannot afford. The Joneses’ finances–or their possessions–should not have any bearing on yours.

Conclusion: Be True to Yourself

No man or woman is an island, and it should not come as a surprise that we are influenced by our surroundings. Still, it does feel somewhat surprising that a lottery windfall for one household would impact the spending habits of others.

Alas, the saying goes, the grass is greener on the other side of the fence. Envy is part of the human experience, and every single one of us has been guilty of this emotion at one point in our lives.

The paper from the Federal Reserve of Philadelphia is yet another reminder not to covet your neighbor’s possessions. The lesson: be true to yourself, and your own financial aspirations.

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