Want to stop consumerism? Brag about your net worth.

Why is it that we buy, and buy, and buy, even when it's detrimental to our financial situation?

There are probably a number of factors, but I think it's due in part to the competitive element in human nature - we want to compare our own success to others.  The problem is, we have no good measures to do so.  Society teaches us that success is measured by material and financial wealth.  While I completely disagree (and would suggest that we can find a better way to measure success and progress), for now let's just admit that whether right or wrong, most people measure their success and relative progress in financial terms.   

The truest measure of financial wealth is net worth - what you have minus what you owe - roughly akin to a corporate balance sheet.  (Generally the financial planning world wouldn't include consumer goods that aren't resalable for notable value such as cars and houses, but theoretically they're part of the equation).
The problem comes in the comparison to others.  In the publicly-traded corporate world, companies report their financials, allowing direct comparison of one company to another.  In the world of personal finance, everyone knows their own net worth (at least they have all the info to know it, even though most people probably don't bother calculate it), but because people don't talk openly about wealth, so we don't know everyone else's.  We are usually left with a guessing game to compare our own net worth to that of others, and can only rely on visible indicators - status symbols.  We can see these things, but we can't see people's financial assets, or debts.  As such, we end up comparing our "complete" net worth to just one component of others' net worth - their "stuff".  

In our minds, we probably assume similar ratios, resulting in wildly distorted comparisons.  For example, if 20% of my assets are in "stuff", and 80% are financial, I tacitly assume others are in a similar state.  And if my debt is only 15% of my assets, I assume others have about the same debt burden.

So what happens when I see my neighbour buying a brand new BMW, and moving to a bigger, better home in a spanky new neighbourhood?   Well...   I apply my ratios to his situation based on the "stuff" I see, and conclude I've fallen way behind in life.  Clearly I must be doing something wrong, right?

Now, I'm not trained in psychology or sociology, so I'm just speculating here based on behaviours I see around me (and admittedly, sometimes my own!).  This thought process definitely doesn't happen consciously, probably because if it did, the thinker would realize how ludicrous it is.  But it all results in people feeling self-conscious about their situation.

And what do most people do when they feel ashamed or self-conscious about something?  They try to hide it.  In this case, they do so by:
  1. Not talking about their financial situation;
  2. Buying more/better stuff so that people won't see their shortcomings; and,
  3. If they can't actually afford the stuff, taking on debt to buy it anyway.
    Notice that in these behaviours, they're probably furthering the same situation for others...

    So in the end, a greater percentage of what they have is in "stuff",  which generally depreciates over time, thereby hurting their net worth.  Plus they probably have more debt, reducing their net worth even more.

    So what should we do about it?

    The answer seems obvious to me (albeit exceedingly difficult to implement):  we should all make our true net worth available for others to see and compare to.  This way we have a real yardstick, and we can't keep up the appearance of success while our lifestyle and our possessions are underpinned by debt.  

    If we did this, the competitive nature of people would drive them to the two things that will maximize their net worth over time (reducing debt, and increasing appreciating assets).  To do that, they'll spend less on stuff, and focus on pragmatic, high-quality, long-lasting stuff for what they do buy.  And that's not just good for their own net worth, but has tangible benefits for the environment, too.

    So, who first?

    Here's where I confess my hypocrisy -- being a fairly private person, I'm not going to be an early adopter of this approach.  

    But the blogosphere hints to me that there is some potential:  Million Dollar Journey provides regular net worth updates, and I'm sure there are others.  So maybe someday more people will start sharing their situations more openly, but for now if you're looking for a benchmark to compare to, there are options.

    There is one thing we can all do, though, right now -- try as hard as we can to stop defining our own success in financial and material terms.  Trust me, it's harder to do than it sounds.


    1. There is plenty of data to show that a great deal of North American’s “visible” wealth is just an illusion built on mountains of debt. Here’s one interesting read on the topic for you: The Current State of Canadian Family Finances (2010). http://www.vifamily.ca/node/783

      What’s really out of kilter about this picture though is that actual millionaires don’t look like ‘millionaires’. That’s right, real wealthy people, as measured by net worth, not by ‘stuff’, don’t typically have the extravagant lifestyle and luxury goods you might assume. (Disclaimer: There are obviously exceptions, and the rules may change again once you get into the ranks of the super-ultra-wealthy.)

      This is documented in a fascinating personal finance classic, The Millionaire Next Door - http://en.wikipedia.org/wiki/The_Millionaire_Next_Door. The two authors spent about 20 years conducting research on America’s millionaires and what they found surprised them.

      They started with an image of millionaires that included caviar eating, BMW driving, luxury-vacation-taking, and basically every other stereotype of a “rich lifestyle”. But it turns out that most self-made millionaires get there by NOT eating caviar, NOT driving BMWs, and NOT taking luxury vacations. In fact, you are more likely to find them eating pizza, driving old-ish economy cars, living in modest homes, and taking modest vacations. And, by the way, not necessarily having incomes particularly higher than everyone else.

      In other words, this book reveals the true secret to financial security and riches is… to live within your means. Yup, I know it’s revolutionary. Spend less than you make. Save the rest. And, on top of that, pay for things with money you actually have.

      Think that sounds boring and dull? Well, if you like living in constant worry about paying your bills, and being chained to your job because you can’t afford to miss a few paycheques – then, you’re right, this millionaire lifestyle is not for you.

      But imagine the benefits of this humdrum existence… by definition it means less consumption, less ‘stuff’, and therefore less waste of the world’s resources. At the same time it brings more freedom – the freedom that comes from true financial security, or, in the parlance of this blog, personal economic sustainability.

      Mind you, it does have ramifications at the macro level. What would drive the global economy if it weren’t for instant credit and instant gratification? (It might take a few more blogs to come up with an answer to that one…)

      All of this is just a long winded way to say, I agree with you – our society, by and large, wrongly places emphasis on visible trappings of wealth and success rather than true wealth and success (which could at least partially be measured through net worth). And this is a significant barrier to our society’s long term sustainability, in all three dimensions.

      So I guess the question that remains is why? Why is it socially acceptable to conspicuously display your consumption but looked down upon to display your thrift? For that I have no solution. Only I did read this fascinating psychology book recently……

    2. LOL... this is hardly a comment, but a post of its own! Hey, HOptimist, I've got an idea: how would you like to collaborate with me on this blog? Oh wait, I'm too late... you already are.

      Seriously though, I have this gut feeling that this is starting to change, and that thrift is starting to be more fashionable, and in fact people are starting to be ashamed of extravagance. I can't come up with any proof of this, I just have that sense that it might be starting to build toward a tipping point...