Financial Appearances are Rarely What They Seem

Here's a piece from US News that talks about avoiding money envy. The key? Realize that the extravagant lifestyles (or even "nice" lifestyles) most people have are funded with debt on a financial house of cards. They note:

What we don't realize is the amount of debt that is supporting other people's lifestyles. We naturally assume that other people can afford what they have and do, when in fact a majority of Americans report living paycheck to paycheck. Twenty years ago, we saved $11 out of every $100 we brought home. Now we don't save anything. Because most people don't talk openly about money issues, especially money stress, we're fooled into thinking it must just be we who are struggling, when in fact it's most people. And once you get beyond the poverty level, income is almost irrelevant: The more you make, the more you can borrow, and people certainly do.

Ha! Lots of truth here IMO -- based on the stats I've seen through the years as well as counseling people one-on-one. Yes, people may look "wealthy" but oftentimes that "wealth" is funded with debt -- or at the very least by a lack of savings (spending all that they earn and saving nothing.)

It's also true that most people spend more when they make more. Sad state of affairs, but it's what happens more often than not in my experience.

They go on:

I went behind the scenes and found out that things are not how they look. That's such a relief and makes it a lot easier to ignore what others have and do.

First, I went literally next door and asked my neighbors, whose life looked so cushy, what was really going on with their money. Somehow I never thought those Marc Jacobs clothes and trip to Paris were charged to a credit card, even though I knew the statistics about credit card debt. It shouldn't be any of our business, but finding out that on her side of the wall, my neighbor was going online constantly checking her credit card balance and stressing out over how to pay for those clothes helped me get over that she dresses more stylishly than I do.

Appearances are very deceiving. We don't see what's going on behind closed doors, but what I've learned, and surveys show, is that there's very widespread anxiety and stress over our personal finances, pretty much regardless of how much money we're making. When we find out we're in the same boat, we can start to calm down, be more rational about our money choices, and conquer our tendency to envy.

So the next time the "Joneses" next door leave driving that brand new BMW on the way to their two-week trip to Hawaii, just remind yourself that appearances are deceiving. Sure, they MAY have saved up in advance to pay for all they have. If they have, good for them. But odds are, they have not saved and are, in fact, funding their high-on-the-hog living through debt.

Consider this your financial reality check for the day. ;-)

Comments

[Mary Kay]

I love this post. Thanks for the reminder that things are not always what they seem. This is another post I'll share with my high school age child.

[Matt]

"keeping up with the debt of the Joneses"

I like the new phrase.

[Brent]

I actually pride myself in not trying to keep up with the Jones as I know the statistics and this article confirms that most people are in debt. Just knowing that I paid cash for my nice newer vehicles when others who drive more expensive ones probably had to go into debt for theirs makes it all worth it.

I hope one day the ones who didn't go into debt aren't the ones bailing these people who did out.

[Old Limey]

My next door neighbors and I have lived on the same street since 1977 and I talk with them from time to time and I observe their lifestyle somewhat. However I don't have the slightest idea what their finances are like because it's not a subject that's any of my business. It makes me wonder about the truth of articles like this and whether they are pure fiction created by writers that just make up stories they think their readers will enjoy. I know I wouldn't be motivated to provide detailed financial data to someone that's writing a magazine article.

[STRONGside]

@Old Limey I totally agree. I don't ask my brothers and sisters about their financial states let alone my neighbors! The truths are there, but I wonder about the validity of this story.

[texashaze]

@Old Limey - Totally agree, this article is suspicious. There is no way I'd ask my neighbor about the specifics of their finances, nor would I share if a neighbor asked.

[DCS]

I see these stories a lot, and I think the "no debt" idea is really getting some traction. Many young people I work with are very debt-averse, I think because they have college loans and they find them frightening (and the ones that are bothered by them are the ones with the least amount of college debt not surprisingly).

However, what I would be interested to know is how many people with no debt also have little or no savings? To me the no debt part of the equation is the easy part. Most of the low/no debt folks I talk to (and I admit it is a very small sample) seem to think paying cash for a used car, having no unsecured debt, having maybe 2 net paychecks in the bank, and getting the full 401(k) match (which at my company tops out at a 6% employee contribution) means they're "doing good" and they are, compared to many.

But they also seem to think they will retire at 55 like their parents with the pensions and retiree healthcare plans did. Not all that likely at that rate.

[Walden]

It is true that you never know what's going on behind closed doors. I have a friend who, on the surface, has an "enviable" lifestyle. She rents a nice apartment in a great neighborhood of the city, goes out all the time, constantly has new clothes, always has the newest gadget, and takes lots of trips. However, she has confided in me (unasked, btw) that she has massive credit card debt, no savings whatsoever, has borrowed from her 401k to pay bills, and her mom helps supplement her lifestyle. Her job is not stable at all, and her management team is less than thrilled with her. And yet she continues to sign up for private pilates lessons, gets her hair and nails done, etc etc... Le sigh.
On the one hand I wish I didn't know her financial situation, but on the other it makes it even easier to appreciate my own life (which is great no matter how you slice it).

[Nashville]

When I married in 1986, I was 33 yo but had no money set aside. I remember the gut wrenching feeling every month for the first couple of years trying to get everyone paid and having almost nothing left over. We dug our way out of that situation fairly quickly but I got so physically sick about not having moeny that I vowed I would never feel that way again. Thank the good Lord, I haven't.

[FMF]

For those of you wondering whether the findings of the piece are accurate or not, I think they are. There are two reasons I think this:

1. Look at the stats on how much people earn, spend, how much debt they have, etc. Most of America is living above their means.

2. In all my years of counseling people on their finances, many of them have been people who it appeared were "doing quite well" on the outside but their personal finances were a mess.

[AH]

I operate under the assumption that my friends, family and neighbors can afford their lifestyles and that they are saving a boatload (maxing out their 401ks, saving 10-20% on top of that for long term goals) before funding luxuries like regularly eating out at rated restaurants, nice trips, and German cars.

I use these assumptions as additional motivation to maximize both sides of the "building assets" equation (work hard to maximize my career so I can earn more and therefore afford to save/spend/give more, as well as constantly re-evaluating the budget to reduce and reprioritize spending when possible/appropriate). Works for me because it becomes about keeping up with economic success vs. keeping up with consumption.

[Mark]

@ Brent: "I hope one day the ones who didn't go into debt aren't the ones bailing these people who did out."

You already have. People who bought too much house, withdrew all the equity to buy toys, then defaulted have handed their debt over to taxpayers vis-a-vis Fannie Mae & Freddie Mac. When people declare bankruptcy, their debts get discharges and generally they get to keep the toys they acquired, but the companies who are stiffed must raise prices to account for this.

And if you are a saver, Ben Bernanke's policy of holding down interest rates artificially essentially allows savers to subsidize debtors, by giving them extra low interest rates on their debts and returning little or nothing to you, the saver.

[Dee]

This types of articles are always interesting to read, but the reaction concerns me. The Envious People, once they realize the Joneses are broke, become the Condescending People and trumpet it — as if that's better.

I'm not saying I don't get jealous of others' financial success (or apparent success). I'm just saying that if I find out their situation isn't all that it appears to be, and start looking down on them, I'm not better for it even though I might "feel" better.

[Dee]

These* types

[Financial Flings]

This is absolutely true. Here is an article from my blog involving the same ideas:

In The Snowball: Warren Buffett and the Business of Life Buffett provides great insight into how people relate those to around them. He states,

The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: "Lookit. Would you rather be the world's greatest lover, but have everyone think you're the world's worst lover? Or would you rather be the world's worst lover but have everyone think you're the world's greatest lover? Now, that's an interesting question.

Here's another one. If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or be thought of as the world's worst investor when you were actually the best?

In teaching your kids, I think the lesson they're learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world's going to think about you, forgetting about how you really behave, you'll wind up with an Outer Scorecard.

So which Scorecard will make you more financially prosperous? To ask the question is to answer it. While some of the most significant problems this country has faced in recent years are due in part to the Outer Scorecards we so proudly displayed in the early to mid-2000s, Americans are now saving more than ever--in June the rate was 5.4% (compare to 2001, when the savings rate was at, or below, zero percent). For many, Financial security is becoming more important than financial appearances. At the end of the day, what your friends or your family think about your net worth does not define your value. While driving an old clunker and wearing last year's clothes (or for that matter last decade's) may seem to some an indication of your socio-economic class, those people aren't going to pay your bills or send your kids to school. You are.

So what could you do if it didn't matter what other people thought of you? How would you spend (or not spend) your money if you knew that no one would ever know what material possessions you had or what things you could afford.