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The Danger in Comparing Your Financial Progress to Others (and What to Do Instead)
Sometimes, I’ll get a message or an email from a reader that starts off like this…
Hi Trent! Love your site! I have a financial problem that I hope you can help me with. I’m 33, my wife is 30. We have a combined income of $300K. We own a home worth $700K and have about $1.5M in stocks and cash.
Right off the bat, I can’t help but compare myself to that story. Sarah and I are both a bit older than that. Our combined income is substantially lower than that, and we don’t have that level of net worth, either.
Are we failures by comparison?
Don’t get me wrong, I relish getting messages from everyone, regardless of their financial state. Everyone has financial struggles, regardless of their income level or how diligently they save. We’re all trying to improve our own situation. I know that I do so when I’m thinking about and writing an article for the site. I’m sure that you’re thinking about the same when you’re reading an article on the site – if not, why are you here?
That doesn’t change the fact that, sometimes, I have my own personal reactions to the stories I hear. Quite often, they make me reflect on my own life. What would I do if I were in that situation? What can I learn from that situation about my own life?
And, yes, sometimes, I can’t help but compare my own situation to theirs.
When I read a story in which the person sharing it has seen a great deal of success, even if they happen to be struggling in the moment, I still can’t help but wonder whether I’m doing things right.
The thing is, we all make those kinds of comparisons sometimes. We look at the lives of the people around us and compare ourselves in certain ways. Is our house as beautiful as our friend’s house on Drury Lane? Are our kids as polite and well-mannered as the children of other people seem to be?
It gets even worse when we go online and can read the stories that others share of their own lives. If you see a tale of someone who earns three times as much as you do in a given year and has ten times the net worth, it’s pretty easy to fall into a pit of self-doubt.
Am I a failure by comparison?
Now, sometimes, comparisons like this can drive us to improve ourselves and improve our outcomes, and that can be a very good thing. However, just as often, such comparisons lead us into areas of very negative personal reflection, often pushing us to simply give up on our progress or make poor emotionally-based decisions in the heat of the moment.
For example, if I’m feeling outpaced by a neighbor, I might buy something just to make myself feel “equal” for a moment, even if, in truth, that might put me even further behind.
If you ever find yourself feeling jealous or envious, I find that there are two really useful strategies to nip those feelings in the bud.
First, remember that true costs and sacrifices are hidden. While you might see a person’s financial success, you don’t see the endless years of studying and preparation. You don’t see the late nights of work. You don’t see the strain on personal relationships. You don’t see the debt load that’s being carried. You don’t see any of that.
Instead, all you see is the expensive house that they’re living in, and you transpose that onto your own life, where perhaps you’re not facing most of those burdens.
Take us, for example. We don’t have a huge debt load hanging over our heads. We have a solid marriage. We have careers that offer great flexibility, even if they don’t offer world-breaking pay.
So, when we see someone with a home like we’ve always dreamed of, we still tend to transpose that home into our own lives. Why can’t we have that home? Maybe we can have that home… (which, of course, leads to a path of bad financial choices).
Another factor worth nothing is that people don’t always tell the full truth, especially when anonymous and online. People tell false stories about themselves and their financial state all the time online. I’m fairly confident that at least a few mailbag questions over the years have come from readers mis-stating their own financial situation. If you go on various personal finance message boards and sites, you’ll see a lot of borderline unbelievable stories (and some that are outright unbelievable). That’s because a lot of them are completely fake.
If you buy into those stories as real and use them for any kind of personal comparison, you’re making a rather big mistake. You’re comparing your own life to a work of fiction, to something that may not even exist. Such a comparison is a huge mistake.
You should not be comparing your actual financial state to mine, or to anyone else, online or off. It’s not a healthy or fair comparison.
Still, many people desire some sort of comparison, just to know if they’re doing well or if they’re keeping up with a reasonable pace. What can you use to compare your own financial progress? Here are some suggestions along those lines.
Use Your Past as the First Point of Comparison
The most valuable point of comparison you have is yourself. Comparing your current financial state to your financial state in the past – a year ago, five years ago, and so on – is the single best way to make sure that you’re on a strong financial path.
The simple question of whether you’re better off than you were a year ago or five years ago cuts through almost all of the challenges described above. It eliminates the issue of lying and other forms of falsehood. It eliminates the issue of hidden elements that you don’t see. It eliminates almost all of the differences between you and what you’re comparing yourself to, with the only difference being your life changes over the last year or two.
Having said that, it can be pretty difficult to accurately estimate your financial state even a year ago, let alone five years ago, if you haven’t been keeping track of it.
So, my immediate suggestion is to make your best estimate of your state from a year ago. Estimate your debt balances and the value of your assets and your checking and savings and credit card balances. Add up the value of all of your assets – your checking and savings and investments and the value of your major possessions – and subtract the value of all of your debts. That’s your approximate net worth from a year ago. Then, use real numbers to do the same thing for today, getting your net worth now. Compare the two. Ideally, your net worth is higher today than it was a year ago, which is proof positive that you’re moving in a good financial direction.
Of course, now that you have a real number, you should save it for future comparisons. Stow it away for a comparison you’ll want to make three months from now or a year from now or five years from now.
Personally, I find value in this type of net worth comparison, but I do it in a different way. I’m not so much interested in the fact that my net worth is going up, but that the rate at which it’s going up is also increasing.
For example, let’s say my net worth is at $100,000 in 2015 and then $120,000 in 2016. That means it increased by $20,000 in a year. Since I want the rate of change to be increasing, that means I am looking for a net worth above $140,000 by the end of 2017, because that means the rate of change is above $20,000, which is more than the change between 2015 and 2016. In other words, I believe that with more experience, increases in wages, and more money invested, my net worth performance should accelerate.
In truth, I trust my own past as a financial benchmark more than anything else. It encapsulates my own reality. No other measuring stick actually accounts for the ins and outs of my own situation, so I use it as a clear litmus test as to whether I’m really putting in the effort to keep my financial progress moving forward. The numbers don’t lie.
Use Standard Benchmarks Rather Than Stories
What if you want more than just your own history as a benchmark? Another approach is to find a standard formula or benchmark that will quickly indicate to you whether or not you’re keeping financial pace.
One very popular financial benchmark is the wealth accumulation benchmark from The Millionaire Next Door. That book offers up a formula for what your net worth should be based on your age and your annual pre-tax income:
Target Net Worth = Age * Annual Pre-Tax Income / 10
So, let’s say I’m 40 years old and make $100,000 a year. My target net worth with this formula would be 40 * $100,000 / 10, or $400,000.
I actually don’t like this formula very well, as I think it’s unfair to younger folks. Let’s say you’re 22 years old, fresh out of college with student loans, but making $80,000 a year at your brand new engineering job. That formula says that your net worth should be 22 * $80,000 / 10, or $176,000. I’m sorry, but that number’s not realistic. So, I proposed a modified form of that equation that accounts for that post-college deficit:
Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5
With that equation, our 22 year old friend above would have an estimated net worth of -$80,000, which sounds about right for someone exiting school with a healthy debt load. On the other hand, our 40 year old example above would be expected to have a net worth of $260,000.
There are countless “retirement calculators” out there that will essentially interview you, asking things like your age, your income, and so on, and estimate where you should be in terms of net worth and saving for retirement. All of these are based on a standard model of where people should be with regards to their goals. In general, I don’t put a whole lot of stock into the calculators from financial firms which almost always indicate that you should have more saved than most people realistically can or even should at their age (because the calculator is trying to encourage you to start saving more because that’s how investment firms make money), but some of the more impartial ones can be worthwhile. Of the ones I’ve tested, I found the Fidelity calculator to be the best.
Use Online Stories and Stories in Your Community As Fuel for Improved Behavior, Not Comparisons
Rather than using the financial stories you read online as a tool for comparison (and, often, as a tool to feel frustrated and unprepared), instead use those stories as inspiration and motivation. If some other person who is posting on that website is doing that well, then you can do it, too!
In general, don’t sweat trying to compete with others in terms of income, but instead focus on trying to match their investment efficiency. In other words, if someone is making $200,000 a year and has a $400,000 net worth, you should be inspired to try to get to a net worth that’s equal to double your income. If someone is making $100,000 a year and socking away $20,000 in retirement, don’t try to hit $20,000 a year – instead, try to focus on saving 20% of your income.
Remember, it’s the ratios that really matter in terms of building long term wealth. If you’re going to take a story at its word, focus on the ratios. (What if you find the ratios completely impossible to achieve? Remember, online stories sometimes aren’t fully true.)
The good thing about focusing on a ratio is that it moves the entire question of how to achieve that ratio to you and your behavior and your situation. What can you do, in your situation, to achieve a 20% savings rate? A 30% savings rate? It no longer has anything to do with the dollars and cents of that other person. It’s about a ratio, and that ratio can become very personal.
When something becomes truly personal, then it becomes about your behavior and your choices going forward, which is where the real power in motivating yourself comes from. Motivation should push you to make personal change, not to feel jealous of what others have.
Focus on Being Thankful for the Things You Do Have
A final key element of the puzzle is to simply be thankful for what you do have in life. Almost all of us have some good things in life and some bad things in life. We have some things that have helped us to have joyful moments and achieve success, and we’ve had things that hold us back.
Rather than focusing on those things that have held us back and rather than feeling envious of the advantages that others have, bring the focus to the good things that you have in life, whatever they might specifically be.
I don’t have a giant income, but what I do have is a very flexible working schedule that enables me to be with my family any time I need to be (and pretty much any time I want to be). That’s something I’m thankful for.
I might not have the house I have always dreamed of having, but we have no debts and we don’t have a whole lot of stress in our lives. That’s something I’m thankful for.
All the people I care about most are at least reasonably healthy. Any long term health issues are well under control. They aren’t interfering in our day to day lives.
So, do I waste my time looking at the things I don’t have? I don’t have that huge income or that nice house. I could dwell on that. I could constantly feel jealous of those that do have those things.
Or, I could simply focus on what I do have – a great family, a career I love, a nice circle of trusted friends. I’m part of several groups and communities that value me. Those things are where the value in my life is right now.
There are always going to be things that you want and don’t have. If you spend your time dwelling on them, it’s going to be discouraging. You’re going to find negative feelings, those negative feelings are going to fester, and they’re likely to drive you toward emotion-based poor choices.
Instead, consciously focus on the positive things in your life. What do you have that not everyone else has? What have you built in your life? What gifts do you have in your life?
Look around. Be creative. Virtually everyone has a lot of advantages and blessings in their lives.
Find them. Consider them. Write them down, and do it regularly. Keep them in mind. Knowing the advantages and blessings you have – and being grateful for them – gets rid of much of the emotional negativity that comes from comparing yourself to others.
We all make comparisons with others. Sometimes, they can be useful, like when they give us positive ideas for ourselves or motivate us toward self-improvement. Sometimes, however, those comparisons can be destructive, especially when they lead us toward feeling bad about ourselves and hopeless regarding our future path.
The key to keeping comparisons to others in a healthy place is to focus not so much at their pure results, but at the transformation they made in themselves, while also understanding that you’re never seeing the full picture. A person with a great house may have sacrificed a lot to have that house, or may have received help invisible to you.
In other words, focusing on another person’s raw results usually gives you bad information. Instead, focus your gaze on the fact that people do improve their situation, no matter where they started, and then watch your own improvements over time while looking at the many things you have to be grateful for in your own life.
In the end, it’s your progress that really matters, not theirs.