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Keeping up with the Joneses is bad for your finances

Lex Hall  |  08 Aug 2018Text size  Decrease  Increase  |  
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Trying to "keep up with the Joneses" only leaves you feeling more stressed and less capable of handling financial pressures, according to a Morningstar behavioural finance expert.

You are better off comparing yourself to people with less money and focusing on how good you have it, says Sarah Newcomb, a behavioural economist with Morningstar.

"Social comparison theory argues that humans have an innate need to assess our social and personal worth, and when there is no objective means to do so, we look to people similar to us to inform an assessment," Newcomb says in her research paper called The Comparison Trap: How Social Comparisons Affect Our Financial Wellbeing.

"Social comparisons may boost or erode well-being, depending on the target and where people see themselves in the socioeconomic hierarchy.

"You won't be able to squash social comparisons completely, but you can guide the direction of your comparisons toward those that make you feel empowered rather than demoralised." 

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Social comparisons can erode well-being

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And people are demoralised, even those on incomes of $100,000. According to a PricewaterhouseCoopers survey last year, 50 per cent of the participants fear they lacked the money to pay for unexpected expenses; more than 40 per cent struggled to cover monthly household expenses.

Newcomb used these findings to conduct her own study last year of 699 US residents. She found that despite a person’s income, age, and education, who they compare themselves with financially played a bigger role in explaining the variations in their financial well-being.

"Harnessing the power of social comparisons" may help improve financial wellbeing and lead to be shrewder decision-making, Newcomb says.

"Everyone's looking up. Our research suggests that most people, in every income group, compare themselves with people they think are doing better than they are.

One solution, backed by science, is to find "new Joneses" – that is, compare yourself with someone on lower pay, Newcomb says.

"This strategy is all about appreciating how good you have it. Make sure the person/group is similar to you. Humans simply don’t get as much value from comparing ourselves with people we have nothing in common with."

Newcomb suggests looking to a similar "role model" – family member, friend, colleague, someone you have a connection with – can lead to more positive financial emotions.

"Feeling more secure with your financial well-being could have beneficial long-term effects by eliminating fear-based behaviours, such as performance-chasing and panic selling, which could put you in a better position to achieve long-term investing success."

 

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Sarah Newcomb, Ph.D., is a behavioral economist for Morningstar. In this role, she works to integrate the findings of her research into Morningstar financial management applications and tools.

Lex Hall is content editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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