It could be tagged the neighbourhood-wealth syndrome: when our neighbour spends money on a costly new car or major renovations, some of us may feel an urge to somehow compete with our spending.
Falling into the trap of trying to "keep up with the Joneses" – as it always used to be called – can be highly destructive for our personal finances. Indeed, it is one of the detrimental behavioural patterns documented by behavioural economists.
US financial planner and personal investment author Carl Richards writes in a New York Times column – headed Staying out of your neighbour’s business – gives the example of a neighbour driving up in a new Porsche Panamera Turbo. (For those with an interest in cars, that’s basically a four-door Porsche.)
Richards believes that most people would jump to the conclusion that this neighbour is doing extremely well financially yet the opposite might be true.
"Your neighbour may be rich," he adds. "He could be leveraged to the hilt. You just don’t know. So what’s the point of comparing and feeling competitive without knowing the full story?"
Richards’ bottom-line: Mind your own financial business.
Smart Investing has previously written about a classic personal finance book, The millionaire next door, by late US academics Thomas Stanley and William Danko.
Research by Stanley and Danko confirms what many of us may suspect: exotic cars and grand houses are not accurate indicators of wealth.
Their research suggests that "prodigious accumulators of wealth" tend not to be conspicuous in their spending and are content to progressively build their wealth.
In other words, they are not in a hurry to either make money by taking excessive risks or to spend their money (or borrowed money) on unaffordable lifestyles, say Stanley and Danko.
Watch out for the neighbourhood-wealth syndrome.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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