You are living above your means if you’re falling into this trap. It’s a recipe for disaster in the world of wealth building.
The truth is: there are three main obstacles to overcome if you want to grow your net worth and avoid the trap of debt. The issue? Most people are unaware that these obstacles even exist.
Before we get into Obstacle #2, a little reminder about net worth:
Net worth = what you own – what you owe
It’s like your financial report card, showing how your financial situation is evolving. Remember, net worth is based on finance, not personhood. We can’t assign a number to your personhood. You are priceless.
We previously talked about Obstacle #1, The Golden Arrow of Consumption, and how it’s holding you back from getting rich.
Today, let’s tackle:
OBSTACLE #2: Keeping up with the Joneses
Ever heard that phrase? It’s all about trying to match the spending of those around you, even if you don’t want or need what they have. It’s like a never-ending game of comparison that’s designed to keep you spending.
But here’s the thing: the Joneses aren’t real.
They’re just a construct. But where you live can heavily influence your spending habits. If you’re surrounded by big spenders, you’re more likely to splurge, even if it’s not in line with your financial goals.
We know that there’s different cost of living in different places, right? You’d have lower expenses if you lived in a rural county in Kansas than you have here in Westchester County.
BUT, you also have different expenses because of the Joneses.
If you had the same income in Kansas and Westchester, but the people around you in Kansas didn’t make fancy purchases, you’d spend less. Why?
You spend on par with the people around you.
Here, surrounded by big spenders, you’re more likely to spend more, even on things you don’t need or even want. Keeping up with the Joneses is the comparison of ourselves to others. This traps us in the negative or low net worth cycle. We’re unable to break out if we keep trying to keep up with the spending of those around us.
HOW TO AVOID OBSTACLE #2: Keeping up with the Joneses
Option 1: Choose to live in an area where the people around you are making an income similar to yours. I’m sorry if this isn’t what you want to hear. Not everyone can afford to live in Scarsdale. To build wealth, you must live within your means. How to calculate if your home is within your means:
- IF RENTING: Monthly rent bill does not exceed 30% of salary. Say you earn $100,000 per year. To calculate your monthly income, divide your annual salary by 12. 100,000/12 = 8,333. Your monthly payment is up to ONE THIRD of $8,333, or $2,777 per month.
- IF BUYING: Within five years, you can save up enough to put a 20% down payment on a home. If you want to buy a $600,000 home, you will save $120,000 in five years. Monthly payment on the home (including mortgage, interest payments, insurance, taxes) shouldn’t exceed 30% of your income. See an example of this above.
- FOR EVERYONE: Here’s a reality check: most people can’t actually afford the homes they think they can. Social media might make expensive homes seem like the norm, but trust me, it’s not. If you disregard steps 1 & 2 above, you are likely to fall prey to keeping up with the Joneses. This can trap you in a cycle of low or negative net worth.
Option 2: Start making some frugal friends. Or, at the very least, start saying “no” to the events that aren’t in your budget, and suggest more free outings. Seriously, spending to keep up with your neighbors will run you dry. It puts everyone else’s opinions above your family’s needs, peace, and security. And I KNOW you aren’t letting the comparison trap hurt your babies’ futures.
Yes, living outside of your means can get you more fancy stuff in the short term.
However, living within your means now gives you peace of mind — and an actual retirement date. It’s time to make the necessary changes and increase your net worth! Rooting for you!
Obstacle #3 seeps into the wallets of almost every person I meet. Look out for my next article, where I’ll teach you how to overcome it.
You got this, mama. Say it with me:
I am in control of my financial future.
