Comparing finances to others can harm your financial security - Nadine Higgins

Comparing your finances to friends and neighbours can lead to poor financial decisions. Photo / 123rf

Focus on your own financial goals and values, rather than comparing yourself to others, writes Nadine Higgins.

“How do I compare to your other clients?” and “I’m actually quite frugal, compared to my friends” – are two phrases I hear often in my work.

The former comes from clients wanting reassurance they’re not “the worst” financial basket case you’ve ever seen, and I understand that. It’s scary exposing your financial underbelly to a stranger, and it’s natural to want some reassurance as to whether you’re “normal” or not.

But it’s the second statement – using others’ spending decisions to justify your own – that can be the most destructive.

When you see how your friends or neighbours spend, we almost automatically make assumptions and draw conclusions. “They must be rich”; “They must be sorted”; “If they can afford that, we could too”; “I spend less than them, so I’m doing well”.

I understand the curiosity, the envy even. I understand the bewilderment of “how did they afford that?”. But if the conclusions you draw then influence your own financial decisions - you’ll quickly find yourself in trouble.

That’s because seeing the way someone spends their money tells you nothing except how they spend their money. It doesn’t tell you what they earn, or what they owe. It doesn’t tell you if they’re making progress or going backwards. You don’t know what keeps them awake at night or prompts fights between them and their spouse. You don’t see under the hood of their finances, so you have no idea if they are indeed rich, sorted, or are just kicking the can of financial comeuppance further down the road.

Unlike you, I do see under the hood of people’s finances, and I can tell you that appearances can be very deceiving.

A client who was spectacularly well-dressed through spending tens of thousands of dollars on fancy threads, was increasing the family’s mortgage balance to achieve that look.

Clients who’d received a cash windfall were blowing through it at a rate of knots to maintain a lifestyle their income could not sustain. Hard conversations were looming as that money ran out.

Two separate clients earned whopping bonuses but were each going backwards through the year until the bonuses hit their bank accounts. Those big dollops of money sometimes only got them back to neutral instead of leaping them ahead. They hadn’t considered what would happen if they didn’t achieve those bonuses.

In each of the above examples, if you looked only at their spending, or over the fence at their houses, they all looked wealthy – when in reality their situations were quite precarious.

Appearances can be deceiving; spending habits don't reveal true financial health or stability.

They say “comparison is the thief of joy” but if your financial decisions are influenced by comparison, it will steal more than joy - it can also be the thief of your financial progress or worse, your financial security.

You might well scoff that you’re “smarter” than that, but in my experience most people are susceptible to some degree to the pressure to fit in, to look the part, join the party, and appear successful. I know I am.

While knowing the reality of your neighbour’s finances might quickly cure you of your desire to keep up with them, few of us are sufficiently open about our finances to enable that.

So, in the absence of transparency, what is the antidote?

I’d suggest thinking hard about what you want. I’d recommend developing a strong understanding of your current situation. I’d encourage you to define your financial capability. The operative words being “you” and “yours”, not “them” or “theirs”. I know, it sounds boringly simple, but I’ve noticed some people romanticise how rosy their financial situation and trajectory is, while others tend to be overly pessimistic and overlook the same trump cards they’d envy in their neighbour’s hand. Neither is that helpful.

If you don’t know where you’re at, and what’s required to get ahead, of course you’ll look to others who you perceive as successful and try to mimic them. You might require an impartial set of eyes that aren’t clouded by emotion or proximity bias to give you a pragmatic diagnosis, but I’d suggest it’s worth it. Understanding your potential for improvement can strengthen the rationale for keeping your eyes on your own backyard, so your spending decisions are driven less by comparison, and more in what will make the future you imagine possible.

Of course, achieving those things you dream of tends to take longer than we’d like, and that’s when our eyes start to wander over the fence.

What can help you stay the course is two things psychologist Jacqui Macguire said to me on The Prosperity Project earlier in the year – defining your values and decoupling your self-worth from your finances.

“If I can be really clear about what’s important to my life, and if I can link my financial aspirations to those values, I think you’re more likely to keep on track”.

If you really value financial security (rather than just looking financially successful), it quickly becomes clear that what your neighbour buys is laughably irrelevant.

The last bit might be a bit harder. Macguire says “For many of us we’ve had it drilled into us, that being wealthy or being financially successful equals being worthy as a person”, when in fact financial success is but one element of your life, “not the entirety of your character and your worth as a person”.

Letting go of what you think you “should” have, do, or achieve might just be the most freeing financial decision of your life.