People can easily fall into “false financial comparisons,” a scenario in which we believe we can afford the same lifestyles people we perceive as “just like us” have, said author Manisha Thakor in her new book, “MoneyZen: The Secret to Finding Your ‘Enough.'”
A certified financial planner, Thakor noticed this phenomenon during the three decades she spent helping people make better decisions around money in her wealth management practice.
“People would come to me and they would be driving the nicest cars [and dressed] in the newest fashions with incredible jewelry and shoes,” she told CNBC. “And I would discover that they didn’t have enough in assets to meet the minimum [to be a client].
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“They looked like millionaires, but they were far from it.”
Thakor came to the conclusion that false financial comparisons can lead anyone to spend beyond their means. Here are three common factors:
1. Fictional financial lifestyles
Characters portrayed in TV shows and movies tend to have expensive wardrobes, apartments and lifestyles, no matter their fictional job.
“When I looked at the homes they are portrayed living in, the cars they drive and the ways they socialize, and I [did] the math assuming they’re earning average incomes for those positions in those cities, the numbers don’t add up,” said Thakor.
For instance, when the renowned sitcom “Friends” was on TV, Thakor was in her early 20s, living in New York as an investment banker. She lived in a fourth-floor walk-up and paid $800 a month for a 400-square-foot studio. If she tried to live in an apartment similar to the one shown on “Friends,” she estimates, she would have probably spent more than half her take-home income.
Thakor’s major concern is people may expect to achieve those characters’ lifestyles if they have similar job positions and have one of two outcomes when that doesn’t happen: They either feel bad about themselves for not having that life or stretch themselves financially to access it.
2. Easy access to credit
Readily available lines of credit may encourage consumers to live up to standards that are not economically feasible, said Thakor.
Instead of once-common in-store layaway plans, where the shopper could make monthly payments until they paid the item off and could bring it home, shoppers can now walk out the door with the product financed on debt, often ultimately paying 50% to 80% more than the original price on minimum monthly payments and interest rates, said Thakor.
“Layaway plans are almost nonexistent these days,” she said. “They’ve been replaced by credit cards.”
“It’s a longer-term trend versus the post-pandemic credit card figures that are due to very real struggle right now,” Thakor added.
Credit card balances are up almost 20% from a year ago, according to a quarterly credit industry insights reportfrom TransUnion. The average balance per consumer rose to $5,947, the highest in a decade.
3. Social media
“Social media puts everything on steroids,” said Thakor. “It is an airbrushed, curated version of our lives.”
People who consume social media are often exposed to content that shows images of people they may know, or from influencers, that make them feel, quite often, inadequate.
Nearly 40% of young adults said they spend more of their money on experiences than necessities such as paying bills, according to a 2022 report by Credit Karma.
However, Thakor is hopeful because she has noticed an increased desire for genuine connections from platform users, and one can’t have a true connection if it’s based on falsehoods.
‘We’re all vulnerable to overspending’
“It really helps to just acknowledge that we’re all vulnerable to overspending to maintain our status, [which] is deeply ingrained into our psyche,” said psychologist Bradley T. Klontz, a certified financial planner and the managing principal of YMW Advisors in Boulder, Colorado.
While it is good to always aspire for better, here are three ways for you to stay true to your financial means as you work your way up to your goals:
1. Acknowledge that we all care deeply
The first step is to realize that everyone cares deeply about their status in social circles, “even if we pretend not to,” said Klontz, who is also a member of the CNBC Financial Advisor Council.
2. Remember that social media can be misleading
“The bottom line is we are inundated with misinformation around how people become wealthy and how wealthy people spend their money,” he said.
Most wealthy people describe themselves as frugal and are tremendous savers, whereas people who show lavish lifestyles on social media oftentimes have a lower net worth.
Therefore, be aware of who you are comparing yourself to online. “You see what they just bought, but what you’re not seeing is their actual net worth,” he added.
3. Reconsider your reference group
“We are always going to be vulnerable to this,” said Klontz. Therefore, he suggests to consciously choose your reference group, or who you compare yourself with. Make sure that reference group reflects your true goals.
There is a concept in psychology called relative deprivation, meaning there is no objective number at which “we’ve made it or are wealthy or well off,” said Klontz. “It is entirely based on what group of people we are comparing ourselves to.”
“Our entire sense of social status relates to the people we are trying to belong to,” said Klontz. “What tribe are you trying to belong to?”