7♥ – Don’t Keep Up with the Joneses

Don't Keep Up with the Joneses - Avoid Lifestyle Inflation and Choose Your Friends Carefully

Don't Keep Up with the Joneses

This post is part of the MoneyDeck series, a pack of 52 playing cards that describe 52 “golden rules” for Private Investors in the UK.

Don’t Keep Up with the Joneses – Avoid Lifestyle Inflation and Choose Your Friends Carefully

Keeping up with the Joneses – also known as conspicuous consumption – is nothing new.

  • The Joneses were an off-screen couple in a 1913 US comic strip.
  • If you want to go back further than that, here’s a quote from Jane Austen’s Pride and Prejudice:

For what do we live, but to make sport for our neighbours and laugh at them in our turn?

We use the term nowadays to refer to people who are focused on appearances, and in particular in appearing well-off.

What has changed in recent times is:

  1. the degree to which we are all bombarded with tailored advertising
  2. the rapid “obsolescence” of our throw-away gadgets
  3. the growth in consumer credit (many of those who appear relatively wealthy may be living off borrowed money)
  4. the replacement of hard work as a virtue with instant gratification, and
  5. the media focus on the lifestyles of the rich and famous (including those famous only for being famous).

All five make us more likely to focus on “stuff” as a source of happiness.

What hasn’t changed is the recipe for financial independence:

  1. work out your budget, your present situation and your goals,
  2. spend less than you earn each year,
  3. invest wisely (in a diversified portfolio of return-producing assets), and
  4. keep your costs and taxes low.

Keeping up with the Joneses goes against the second and most important of these rules

  • you can’t spend less when you’re trying to keep with someone who is spending more.

The trouble with stuff is that it will never make you happy.

  • Happiness is an attitude to life that comes from within, not a set of goods.
  • You’ll feel happier when you have financial security, but not just from having loads of stuff.
  • If you look back at the times when you were happiest, how many of them involve lots of money?
  • And how many of them involve things, rather than experiences?

We are programmed to want more, but that programming remains in place when you acquire whatever the first set of “more” was.

  • After a brief period of respite from wanting, a new set of “must-have” goals will kick in.
  • The old aspiration becomes the new normal, and luxuries become necessities.
  • This is known as hedonic adaptation, or the hedonic treadmill. ((The good news is this one works in both directions – if you have a major negative life event, you will most likely return to a similar level of happiness in a relatively short period of time ))

You need to be clear about which things are needs, and which are wants.

  • When I grew up, the only services to a house were water, electricity, gas and sanitation.
  • We didn’t even have a phone until I was a teenager, and our TV was small and black and white.

Now even those on the lowest incomes want a 50-inch flat screen, cable or satellite TV, high-speed internet, a smart phone and a tablet computer.

This is progress, and it’s not a bad thing if you handle it right.

  • The way that capitalism works is that new things are very expensive, and then as more people adopt them, they become cheaper.
  • The secret to not spending too much on bleeding-edge gadgets is to avoid being an early adopter.

The other feature of capitalism is choice.

  • There are options at every price level, so that the maximum money can be extracted from the population.

So beat the capitalists at their own game, by choosing the option that you need rather than the one that you want.

  • Do you really need an SUV, just because the guys next door have one?
    • Those I see in my neighbourhood are carrying one or two people, and they aren’t going off-road.
  • Do you need a Dyson?
    • How clean can your carpet be?

Or do you need to save money for a secure retirement?

There are three related concepts here:

  1. measuring yourself against other people (keeping up with the Joneses in the strictest sense),
  2. the company that you keep, and how their values affect your own, and
  3. lifestyle inflation (spending more as you earn more, also known as lifestyle creep).
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The trouble with trying to keep up with other’s spending habits is that you can never know what their real financial situation is – they could be living off credit.

  • And there’s a real danger that you’re trying to catch up will only spur them on to spend even more to keep ahead.
  • This arms race of consumption is a vicious circle that benefits no-one in the end.

Competition and the natural instinct to compare yourself to other can be positive, but only if you chose the right role models.

  • Instead of looking at those who spend the most on bling, why not follow those who save the most?
  • Or those who live the healthiest lifestyle (eating well and getting enough exercise)?
  • Or those who embrace life-long education and learning?

There’s some evidence that in certain circles – notably left-leaning, metropolitan ones – green credentials, political opinions and charity giving are signs of status.

  • The question is to what degree this is sincere, and how much of it is merely virtue-signalling.
  • It could be a reaction to the wider availability of material goods, and the fact that the “wrong” sort of people can now more easily afford them.

Let’s talk a little more about lifestyle inflation.

As your career develops, and your salary increases, it’s human nature to want to consume things that reflect the progress you’ve made – this is known as entitlement ((Though the negative connotations of that word mean that most people won’t describe it that way ))

  • You might want to rent or buy a flat in a nicer neighbourhood, or to buy a “better” car.
  • You might choose a new, richer set of Joneses to try to keep up with.

But one nice thing can easily lead to another – this is the Diderot effect.

  • Diderot was a French philosopher who wrote an essay called “Regrets on Parting with My Old Dressing Gown.”
  • The bottom line was that his fancy new dressing gown makes all his other stuff look bad, so he had to go and replace all of that as well.

I was absolute master of my old dressing gown … but I have become a slave to my new one. ((This is closely related to the adage “the stuff you own, owns you as well” ))

Spending all of your pay rise is one of the biggest – and most common – financial mistakes that you can make.

  • The simplest way to increase your savings rate is to make sure that most of the new money goes towards savings.

Let’s look at a simple example:

Let’s say that we think that the career average savings rate that you need for a secure retirement (eg. becoming financially independent somewhere between age 55 and age 65) is 20%.

  • Straight out of college and earning £20K pa, it’s likely that most people in their early twenties will be saving next to nothing (beyond servicing their student loans).

Fast-forward to their late twenties, and a pay-rise to 30K.

  • After tax and NI, that’s around £7K of new money.
  • If they were to save the whole £7K, they’d now be above a 20% savings rate.
  • Even if they splurged £1K and saved £6K, they would be on track.

Looked at the other way, unless they save at least some of the pay rise, they can never hope to get past living from paycheck to paycheck.

  • Once you are saving enough for the future, you can take a more relaxed view of what to do with windfalls and pay rises.

Now, a little about the company you keep.

  • You may have heard the saying that you are the average of the five people closest to you.

Even if you think that’s a bit of an exaggeration, there’s truth in the fact that your friends and family will affect your attitudes and behaviours.

  • If your friends eat or drink (or smoke) too much, it’s likely that you will, too.
  • If your friends are active and healthy, you are more likely to live your life that way.
  • And if your friends spend too much money, so might you.
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This is called adaptation.

  • Humans naturally assess how well they fit into a given environment, and work towards fitting into it even better in the future.

Financially, it will reward you in the long run to spend time with people who have similar lifestyles – and budgets – to you.

  • That goes double for your partner / spouse (though we assume that you have similar budgets because you’re probably sharing your income and expenses, if not necessarily your savings).

Hanging around with people richer than you will put pressure on your lifestyle and your budget.

  • They’ll want to fill the time you share together with pricier food, drinks and events.
  • They’ll fill their house with things you can’t afford and tell you about their expensive holidays, and the private school their kids attend.
  • They’ll give you lifts in their expensive car.

If you can handle all this without increasing your own spend, then fine.

  • But if not, you might want to spend more time with those in your own price range.

To finish, here are a few rules to follow to help you guard against all of these traps:

  1. Make sure you have a budget
    • And track your spending
  2. Live within your means
    • You must spend less than you earn
  3. Make sure you have a savings plan with long-term goals
    • You need to know where you are, where you’re going, and how to get there
  4. Have a long-term plan for what “enough” looks like
    • You have to know when to stop
  5. Prioritize debt
    • If you are still paying off loans, that must come before new spending – automate the payment if you can
  6. If you can’t pay for it with cash, you can’t afford it (yet)
    • The only thing worth buying on credit is a house to live in
  7. Pay off your credit card bill every month
    • If you have a rolling balance, you need to cut back your spending
  8. Don’t compare yourself with others
    • You can never know what’s going on in their life, and their apparent “success” could be debt-fuelled
  9. Instead, use yourself at some period in the past as the benchmark
    • Are you doing better than then? Are you happier?
  10. Pay yourself first
    • Make sure that you are saving enough each year before you spend on luxuries
  11. Try to think in percentages
    • You can spend 10% each year on luxuries without risk or guilt, but you must make sure that 20%+ is being saved
  12. Always use a shopping list, and do your research
    • Don’t buy anything on impulse
  13. Work out which brands (if any) are really providing you with value
    • The main difference between most brands and unbranded is the packaging and the size of the advertising budget
  14. The same goes for stuff
    • 80% of the pleasure you get from things will come from 20% of the things, so work out which ones they are and focus your spending on those
  15. Look for substitutes for the expensive activities that you do
    • Things that you’ve been doing for years might well not be as satisfying these days
    • You can also try doing some things less frequently, so see if they become more pleasurable (eating out is a good example here)
  16. If you are paying someone else to do something, couldn’t you learn to do it for yourself?
    • Not only will you save money, you’ll feel better about yourself
  17. When you get a pay rise, allocate most of it to savings
    • Keep at most 10% or 20% to reward yourself for the success
  18. Watch out for the Diderot effect and hedonic adaptation
    • Will this new toy really make you happier? For how long?

Good luck, and remember:

Don’t Keep Up with the Joneses – Avoid Lifestyle Inflation and Choose Your Friends Carefully

Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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2 Responses

  1. Thomas says:

    Excellent article. I’ve shared it with a few friends

  1. March 19, 2018

    […] are many habits that might lead to over spending. Keeping up with the Joneses, an unwillingness to sacrifice luxuries, overblowing Christmas and excessive lifestyle inflation […]

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7♥ – Don’t Keep Up with the Joneses

by Mike Rawson time to read: 7 min