Ramit Sethi says this is ‘the beginning of every financial disaster’

An elegantly dressed man sits on an expensive sofa in a lavishly decorated room.

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It’s a decision that rarely ends well.

the main points

  • Ramit Sethi’s chat with a married couple showed how trying to keep up with the neighbors can lead to financial disaster.
  • This kind of lifestyle envy often results in poor spending choices.
  • Remember that appearances don’t tell the whole story, and remember your financial goals.

A few financial mistakes aren’t a big deal in the grand scheme of things. Others can have huge financial ramifications, and they are the ones you want to avoid at all costs. personal financing Guru Ramit Sethi, Author I will teach you to be richrecently pointed out one of those costly mistakes, something that gets a lot of people into financial trouble.

What Ramit Sethi calls “the beginning of every financial disaster”

in An episode of the Sethi podcastHe was talking to a couple who just bought a vacation home. It ended up costing them a little more money than they expected, so Sethi talked to them about why they should buy it. They talked about how they lived in a more modest house than their friends, and even a friend who didn’t make much money bought a nicer house than theirs.

“This is the beginning of every financial disaster,” Sethi immediately noted. And blunt as always, he added that “the worst thing in the world is finding out your friend is dumber than you have more money.”

Now, the disastrous part is not discovering that your (maybe less intelligent) friend has more money than you. She wants what your friends have and bases your spending decisions on that. Or, as it is traditionally known, “Keeping Up with the Neighbors”.

In this case, the couple on Sethi’s podcast were jealous of their friends’ homes. But there are many ways this feeling can manifest. People are jealous of cars, clothes, vacations, and more. Social media hasn’t helped matters, as it often contributes to this kind of lifestyle envy. A Point poll even found that 45% of respondents went into debt to buy something they saw on social media.

Why envy costs you money

It’s totally normal to want to keep up with the neighbors. Most people have probably dealt with this feeling at one time or another. He acts on this impulse, which is problematic.

Going back to this couple on Sethi’s podcast, their vacation home turned from a dream into a nightmare. It ended up putting such a strain on their finances, that their best option was to sell it, even though they would end up losing $100,000.

This may seem like an extreme example, but it’s not entirely out of the ordinary. Let’s say your neighbor has bought a great new car, and you decide you want one, too. the Average new car price Only about $50,000, and if you’re looking for a luxury car, the average is $66,660.

Even with small purchases, this can become a bad habit that leads to bigger financial problems. Once you get into the “I deserve what my friends have” mentality, it’s easy to keep using it to justify more and more spending.

How to keep your spending under control

To be clear, there is nothing wrong with spending money on things that make you happy. In fact, it’s smart to set aside some money in your monthly account income For this. But there are some caveats here.

First, they need to be things that actually make you happy β€” not just things you buy to keep up with others. It must fit your budget.

As mentioned earlier, many people feel envy about their lifestyle, and it is not always easy to get rid of it. I went through it myself. Here are some tips that worked for me:

  • Remember, appearances don’t always tell the whole story. This friend in designer clothes can be profound credit card debt And they have nothing to save for retirement. Just because someone seems to have everything doesn’t mean they are doing well financially.
  • Keep your financial goals in mind. Think about how a large, unnecessary purchase might affect these goals. I like to think how much money he could make Compound interest If you invest it instead of spending it.
  • Set aside a portion of your income for guilt-free spending. Ramit Sethi recommends reserving 20% ​​to 35% of your income for Guilt-free spending. While the amount you set aside depends on your income and expenses, it’s important to leave room for fun money in your spending plan.
  • Find out what you really want to spend your money on. Maybe a nice car is important to you because you drive a lot, or maybe you’d rather avoid spending a lot in this area until you can Travel more. Take some time to figure out your spending priorities so you can use your money wisely.

Spending money to compete with others, says Sethi, is a path to disaster. If you can avoid doing this, you will be happier and better off financially.

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