What “Keeping Up with the Joneses” Can Lead To

By Lindsay Frankel

 

Inside Subprime: July 20, 2020
Your neighbors (We’ll call them the Joneses) buy a new swing set, so you buy an even bigger swing set for your kids. Mr. Jones can’t stop talking about his new TV while you’re at his house watching football, so you come home with an even bigger TV the following week. Mrs. Jones comes home from the mall with too many bags to carry, and it leads to your untimely shopping spree. It’s a mentality known as “keeping up with the Joneses,” in which people compete with their peers to appear the most successful. And the tendency doesn’t occur just within neighborhoods anymore; we see the Joneses all over social media, and it can be tough to escape the influence of their purchasing behavior. Millennials in particular are falling prey to instagram influencers (and their own friends) who model excessive spending. One report found that 40 percent of millennials have willingly gone into debt to match the lifestyle of their peers. 

The Joneses Are Struggling, Too

Numbers don’t lie, and most of the evidence paints a bleak picture of financial life in America. Anywhere from 59 to 78 percent of Americans are living paycheck to paycheck, according to survey data. And it’s not just low-income people that are struggling to cover all their bills. Nielsen data showed that one out of four families earning $150,000 are living paycheck to paycheck as well. 22 percent of Americans don’t have any spare cash stashed away at all, meaning the U.S. ranks worst in the world for saving. 

And 37 percent of Americans wouldn’t be able to cover a $400 unexpected expense without borrowing money or selling something, according to the Federal Reserve. As a result, many Americans go into debt to make ends meet. That’s part of what has led to a collective $14.3 trillion in household debt. 

The Federal Reserve found that while three quarters of Americans have something saved for retirement, 37 percent don’t believe they’re on track. And some of those people may be overly confident; a separate study from Northwestern Mutual found that 56 percent of Americans don’t even know how much they need to retire. That’s reflected in the current financial situation that many retirees find themselves in. A 2020 report revealed that 40 percent of retirees are living on social security without other income sources, but the money isn’t sufficient for people to live comfortably and preserve their health. 

Much of this is due to high healthcare costs, costly student loan debt, and the rising cost of living in many areas, but some of it can also be attributed to irresponsible spending in an attempt to “keep up with the Joneses.” 

In an effort to measure how competition with peers affects financial stability, researchers for the Federal Reserve Bank of Philadelphia tested a hypothesis that income inequality within communities leads to financial distress. The study revealed that when one person in a small neighborhood won the lottery, other members of the community were more likely to file for bankruptcy. That’s how far some people will go to appear to be on the same page financially with their neighbors. 

How to Succeed Instead

An entire movement has developed based on the idea of prioritizing savings over spending to appear rich. The Financial Independence, Retire Early (FIRE) movement is motivating people to participate in a simpler way of life that allows them to retire in their 30s or 40s. 

But social comparisons can be hard to avoid, and they can be really damaging. A Morningstar study found that comparing ourselves to others has a greater impact on our financial well-being than any other factor. Those who made more frequent comparisons, and those who measured themselves against others they believed to be doing better financially, faced greater financial stress. 

Taking a break from social media can be one way to mitigate the urge to spend. But the research also revealed another potential solution: Choose a financial role model that inspires you to save rather than making you feel pressured to spend. Pick someone who:

  • Is below your pay grade
  • Is similar to you, so you can relate, but not too similar
  • Has a level of wealth and savings/spending habits that you can reasonably achieve yourself

“Human beings are wired to make social comparisons. But by changing the target and direction of our social comparisons, we can create more positive emotions with our finances. This might not change your economic reality, but it could improve your quality of life,” the report notes. “And feeling more secure with your financial well-being could have beneficial long-term effects by eliminating fear-based behaviors, such as performance-chasing and panic selling, which could put you in a better position to achieve long-term investing success.”

For more information on the middle income consumer, subprime loans and payday loans, see our city and state financial guides including states and cities like California, Texas, Illinois and more.

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