As humans we have an innate need to evaluate our worth and position in society. When we lack an objective measure to do so, we look to "similar others" to judge our progress. Recent research from Morningstar shows that this normal human instinct may be causing us more harm than good when it comes to our money.
In a survey of several hundred people, we found the following:
- People in every income group were more likely to compare themselves to people they see as better off than those they see as worse off.
- Frequent, upward comparisons such as this were associated with higher financial stress, lower satisfaction, lower savings and overall more negative feelings about one’s own financial life.
Social comparisons were strongly correlated with financial well-being. In fact, when looking at the relative effect sizes of the things we typically associate with financial stability (age, income, education, and financial literacy) we found that the effect size of social factors was greater. This suggests that the way we compare ourselves to others might be a very important part of overall financial health.
However, one small group of people in our study reported feeling positive about their money regardless of whether the people they compared themselves with were better or worse off. Unlike the rest of the population we surveyed, this group did not compare themselves with peers, family, friends or colleagues. Instead, this little group of 27 people reported comparing themselves to a financial role model or mentor. This, we thought, was interesting.
Could it be that choosing a financial role model is a way to direct our natural need to compare into a form that is aspirational rather than evaluative? Is this a cure for our financial ills? In a follow-up study, we asked several hundred people to participate in a short exercise in which they identified a financial role model and thought a bit about that person's behaviors and the qualities that led to their success. A second group was asked about who they compared themselves to normally, and a third was not given any comparison task. All three groups were then asked a series of questions about their financial confidence, and other emotions with respect to their money.
The people who chose a role model were significantly more likely to report being confident about their ability to reach their financial goals than those who made their normal social comparisons. They were also more determined to reach those goals and reported feeling more in control of their financial future than those who did not choose a role model.
The results of these studies show that, while we cannot avoid the instinct to compare ourselves, we may be able to improve our financial well-being by directing our attention to a specific financial role model.
In my own life, I have chosen to emulate my mother. While she earns less, she also lives more simply. I admire her resourcefulness and her contentment. By turning my attention away from neighbors and colleagues, and focusing on her as my financial mentor, I have been able to improve my own quality of life and reduce my financial stress in a short amount of time.
Whose financial decisions do you admire? What is one thing you can do today to be just a bit more like them?
This post initially appeared on Morningstar.com
