This post by Craig Guillot comes from partner site Mint.
Everyone overspends a little and splurges on occasion. But for many, “keeping up with the Joneses” becomes an overwhelming obsession that can lead to financial ruin.
Regardless of how much one makes, if they spend beyond their income, their finances will eventually fall into a downward spiral.
Keeping up with the Joneses happens to everyone from ordinary Americans to even the rich and famous who declare bankruptcy and lose their homes to foreclosure.
Financial psychologists say the drive to splurge and keep up with the Joneses is rooted more in psychology than a lack of financial skills. Animal brain thinking, the need to fill a void, or the desire to simply impress, can drive people to irrationally overspend on material items.
Keeping up with the pack
According to the Country Financial Security Index, more than half of those surveyed said they spent more than they make at least occasionally on a monthly basis.
Nine percent of respondents said their lifestyle is more than they can afford and 21 percent said their monthly spending exceeds their income at least half of the year.
Of those who spend beyond their income, 36 percent said they dip into savings to meet financial goals while 22 percent said they rely on credit cards.
Buying material things to impress others is also frequently referred to as “conspicuous consumption.”
The term was originally coined in 1899 by sociologist and author Thorstein Veblen to describe the behavioral characteristics of the nouveau riche who used their public consumption of goods and services as a way to manifest their social power and prestige.
Back then, you either had money or you didn’t. But today, credit cards, home equity loans, and loose lending arrangements make it relatively easy for consumers at any income level to spend money they don’t have.
Brad Klontz, Psy.D, CFP(R), a financial psychologist and director of H&R Block Dollars & Sense, says the “animal brain” often takes over when it comes to money and comparing ourselves to those around us.
Subconsciously, humans look at those around them for confirmation of their social and economic status. In the modern world, those signals come in the form of houses, cars, clothes, jewelry, and material possessions.
Whereas a peacock fluffs his feathers and a lion flaunts his mane, humans flaunt their material possessions.
“It makes no rational sense but the animal brain tells us to think in terms of survival and it’s a terrible idea to be left behind. The slowest runner misses out lunch or becomes lunch,” says Klontz. “People think they need these things.”
Psychologists frequently refer to these items as “wealth signals.” They’re essentially displayed to indicate that the owner of the item has wealth, power, or some kind of higher social status.
Sonya Britt, assistant professor and Program Director of Personal Financial Planning at Kansas State University, says it’s hard to avoid all of today’s wealth signals that indicate what we should strive for, how we should be living, or what we should be buying.
In the past, we may have only been aware of what our neighbors had, but today, we’re constantly bombarded with wealth signals on television, the Web, and social media. Subconsciously, we want to display those signals ourselves.
“It’s a problem that is getting worse because we are going to continue to see what we should be buying,” says Britt.
Psychological problems = money problems
Most psychologists and financial advisers agree that severe overspending and conspicuous consumption is more about psychology than a lack of financial skills. Britt says it can often be traced back to underlying physiological stress, which causes the consumer to think with a “fight or flight” mentality.
Combine that with the need to keep up with the herd and some people will just spend even if they know what they’re doing is bad for their finances. “Others indulge themselves with luxury material items due to low self-esteem,” says Britt.
“You can educate a person all you want but it all goes back to those [underlying psychological issues.] That part of the brain just shuts off. They are simply incapable of realizing how spending all that money is not good for their future,” says Britt.
Mari Adam of Adam Financial Associates in Boca Raton, Fla., says she sees overspending in as many as 30 percent of her clients.
Regardless of how much they are saving and what kind of investments they are choosing, Adam says their finances are negatively impacted when they’re spending beyond their means. She says it can be an “addiction” for many.
“For a lot of people, what they buy and what they have is tangled up in their identity. Overspending is usually a psychological problem that manifests itself as a money problem,” says Adam.
There are other psychological aspects that further contribute to the problem. Steve Lewit, CEO of Wealth Financial Group in Buffalo Grove, Ill., says he often sees what is called the “ratchet effect.” It’s where people ramp up their spending over time and are psychologically not capable of scaling back their lifestyle.
“Expenses go up a lot easier than they go down. It’s just very hard for some people to stop spending. They want that lifestyle and feel they need it even though they know they can’t afford it,” says Lewit.
The bill will come due someday
The biggest problem with keeping up with the Joneses is that people who live beyond their means almost always make up the difference by incurring debt or failing to save.
“In either case, the bill will eventually come due at some point down the road,” says Adam. It may happen as bankruptcy, foreclosure, a mountain of credit card debt, or as a penniless and destitute existence in your golden years.
Ironically, Britt says those who try to live the high life at the expense of savings or by incurring debt actually decrease their chances of ever attaining that lifestyle. Overspending and conspicuous consumption provides short-term rewards with long-term prices to pay.
“They want to move up to a different social class but I don’t think they realize they are doing exactly the opposite and preventing that from happening,” says Britt.
Klontz says most obsessive overspenders won’t change their ways until something bad happens, whether that’s running out of money, bankruptcy, foreclosure, or the loss of their job.
Klontz says the recent recession was a “wake-up call” for many Americans, forcing them to save more and think twice about incurring debt.
“Unfortunately, it usually takes some kind of crisis for people to wake up and change their behavior,” says Klontz.