Guess How Much I Make?
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We make up stories in our head every day to explain things around us. If a neighbor buys a new car, we think they must have gotten a bonus or done really well to afford such a luxury. Or if someone new moves into the neighborhood, we make assumptions about how they got the money to buy the house, what kind of job they must have or the size of their trust fund. These stories are all fiction. They are not based on facts like paystubs and tax returns. These stories can have two very negative effects: 1) They can lead us to make our own spending decisions to Keep Up with the Joneses, and 2) They can create a sense of entitlement.

The Relative Income Hypothesis developed by James Duesenberry states that an individual’s attitude toward spending and saving is dictated more by his/her income in relation to others than by absolute terms. It also hypothesizes that what you spend today is not just based on how much you make today, but also by how much you spent in the past. It is very difficult for a family to reduce a level of consumption once attained. I have seen this trap first hand with many clients. Once you adjust your lifestyle to a higher income level, it is very hard to scale back in leaner years. In fact, you can come to expect a certain lifestyle. This expectation is akin to entitlement.

Is entitlement bad for you? In short, yes. Have you ever thought to yourself, “I work hard, I deserve a Fill in The Blank”? The definition of entitlement is the belief that one is inherently deserving of privileges or special treatment, or that you have the right to something.

Entitlement leads to setting expectations. When those expectations are not met with the reward you expect, it leads to disappointment. The ego gets bruised from the disappointment and wants to blame someone or something else. This blaming further reinforces the sense of entitlement.

A sense of entitlement can keep you poor in money and life in several ways. First, disappointment can prevent you from working hard in the future because why should you bother when it didn’t work out the last time. Second, if you grew up living a certain lifestyle or see your parent’s living big, you may spend more than you can afford because you think you deserve it. And third, you think you deserve “Fill in The Blank” because you work hard. Hard work does not always have an immediate pay-off. It can take years or decades of sacrifice and hard work to see the pay-off. You don’t actually deserve anything, except freedom of speech and other rights in the US (and even those may not be absolute).

Instead of telling these stories, break the cycle by taking this simple steps:

  • Be aware. Notice when you start making up a story to explain someone else’s life.
  • Admit it. Either in your head or to your spouse, acknowledge that the story is fiction and not real.
  • Remind yourself of your financial goals and reality. Those are the only ones that matter.
  • Make spending decisions accordingly.

When we change our own behavior, our kids will follow our lead.

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