Don’t spend based on other people’s income

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The practice of storytelling is ubiquitous among cultures all across the globe. Sometimes we seem to forget the power that a story can hold over people. We use stories to make sense of our world and to share that understanding with others. When it comes to something as important as finance it is important that the stories we tell ourselves are based in reality.

Yes, the stories that we tell ourselves. We can be forgiven for inflating the truth amongst friends, since most of the time everyone is aware that the story is unbound by facts in the name of entertainment value. But when creating the stories that we tell ourselves, the stories that we make financial and life decisions based on, our brains can play tricks on us.

A notable example of this brain trickery is known as the Relative Income Hypothesis. This hypothesis, developed by an American economist named James Duesenberry, states that an individual’s attitude to consumption and saving is dictated more by their income in relation to others than by an abstract standard of living.

In more basic terms, we base our spending habits on how we think our income compares with those around us – our neighbours, family and friends. A classic case of keeping up with the Joneses, except we have absolutely no clue what the Joneses financial situation looks like compared to our own. So, we create stories.

If our neighbour pulls up in a flashy new car we might be saying to ourselves, “How can they afford THAT?!”, “Their payments must be through the roof!”, “Are they more successful than me?”… only to find out a few days later that the car was on loan from a dealership while their regular vehicle was getting fixed. It is possible we might have even started looking at financing a new flashy vehicle of our own just to see if it would be viable.

That is the power that stories can have on us. We can go from financial contentment to debt in the space of a misunderstanding. It is important to remember that the only financial situation that matters is our own.

But, let’s say the flashy car was your neighbour’s latest toy to keep, would rivalling their new purchase really make us happy? We shouldn’t be feeling like we are stuck in a rat race. If we can nurture an abundance mindset we will see that life is full of opportunities.

If you’re running low on opportunities or feel like you’re financially stuck then let’s get in touch!

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