Comparing Your Wealth is Stealing From Yourself

By David Geller   |   September 28, 2017

Wealth Management Advice re Comparing Wealth - Relative Deprivation

Picture this: Bernard is loving the smooth drive to the firm’s annual gala in his brand new BMW 7-series, a car he’s craved for years. But his pride vanishes as his buddy Ethan pulls up in a new $150k Tesla S P100D. “With Ludicrous mode!” Ethan crows as they head inside.

In a flash, Bernard’s excitement melts: Someone else (and Ethan!) has something better (and Ludicrous!).

This abrupt change—from contentment to discouragement in six seconds flat—is so common that scientists have a name for it: “RELATIVE DEPRIVATION.”

RELATIVE DEPRIVATION IS A PROBLEM OF PERCEPTION, NOT REALITY.

Compared to most Americans, many of us are drowning in material riches. Look at our homes, clothing, travel itineraries, toys ….

Yet despite our undeniably high standard of living, it’s easy to feel poor next to people with more, and that affects us in surprising ways.

So Ethan has a tech-loaded supercar. So what? Well, Bernard fumed all night. Left unchecked, relative deprivation can drive behaviors that don’t serve us personally, professionally and financially.

Wealth Management Advice re Comparing Wealth - Relative Deprivation

COMPARING OUR WEALTH TO OTHERS IS NATURAL, BUT A GAME WE CAN NEVER WIN

Somebody will always have more. If not Ethan, then your old college roommate who made millions as a venture capitalist. Or Jeff Bezos, or even Bill Gates.

Asking “Do I have more than my neighbor?” helps us undervalue our own good fortune and ourselves. (Bernard loved his BMW until he saw Ethan’s Tesla.) Whatever we buy or do, it just can’t fill that gap.

That’s no way to live.

FAKE NUMBERS AND FINANCIAL PLANNING

Yet many people do. Relative deprivation is a common and natural problem we see too often. When clients join us, they often tell us how much money and what return they need. Here are actual pronouncements we’ve heard in meetings:

I need $10 million before I retire.”
“I need $50k a month to live.”
“I need a 10% annual rate of return.

Yet with probing (“Can you tell me how you arrived at that number?”), we often find that those numbers were pulled from the ether. And typically, distorted perceptions drive those declarations. Often, what humans perceive as need is our natural human desire to feel equal to (or better yet, better than) friends and neighbors. And to be blunt, sometimes that “need” is an itch to flaunt our superior investment returns on the golf course.

So you aim high. So what?

YOU’RE STEALING FROM YOURSELF

If we think we need $10 million but only have $5 million, we may imagine we’re always behind. Even if a conservative projection shows we’ll likely never need more than $3 million, we may worry we’re downgrading our expectations.

Plus: Jockeying for MORE takes time and energy you could spend on things that are more important to you. We see it all the time: people are compelled to chase the next great deal. Or they toil longer/harder at dismal jobs to earn money they don’t need. Side effects like sleepless nights and unhappy, anxious days can sour these strategies even further.

Doesn’t your life have enough stress already? Don’t let relative deprivation rob your most valuable resource: YOUR TIME.

JOYN uses cognitive tools and behavioral science expertise that can help you neutralize those negative feelings, change your perception and feel more confident. (We apply tools/expertise with our clients for exactly that reason.) With that confidence, you can worry less and enjoy life more.

But feelings aside, it also can hurt you financially.

ARTIFICIAL TARGETS CAUSE US TO TAKE UNNECESSARY RISKS

Realize it or not, our emotions can make our brains blind to risk.

In the relentless pursuit of MORE, people often take outsized risks chasing bigger returns. But risk—especially unnecessary risk—is one of the greatest obstacles to achieving the rate of return you truly need. Big risks can plunk your portfolio in the water hazard and permanently impair your financial future.

Wealth Management Advice re Comparing Wealth - Relative Deprivation

WE THINK THERE’S A BETTER WAY.

Figure out what you really need. With our clients, we start with a meaningful discussion about how they live now and what they plan to do in retirement.

Then build cash flow projections based on those answers. Since there are abundant variables, we recommend consulting a trusted pro—one who can build a custom, flexible model that incorporates your lifestyle now and later. (And don’t forget future contributions and expenses.) In addition, plan beyond the basics; your model should include things you want to buy (vacation property?) and do (cover grad school?).

Naturally, the model must incorporate your time horizon, risk tolerance, market variability, taxes, and other factors. Then, since experience never perfectly matches projections, you should repeat the process every few years. (We do all the above, BTW.)

Compare what you need to what you have now. For most clients, the reveal often comes with surprises.

  1. This reality-based analysis typically confirms they don’t need as much as they thought to live the way they want. But there’s often even better news.
  2. Many clients are also amazed to learn they’ve already hit their true “Magic Number.” And if they aren’t there yet, many are relieved to know they’re on track, often with margin to spare. (FYI, there’s no magic involved—just solid financial modeling!)

Imagine your elation when you realize you’ve done it: amassed the wealth to live the life you want.

CONCLUSION

Changing natural human behavior takes time and effort, but we’ve seen clients and friends make enormous progress toward cherished goals with proper help.

It starts by understanding what’s going on inside that big brain of yours, then a meticulous analysis to determine your REAL “magic number.” From there, we create a financial plan and investment portfolio—one rooted in reality, which creates confidence.

Remember: Your net worth doesn’t measure your self-worth. Wealth is just a tool to create the meaningful, joyful life you’ve worked so hard to achieve. Once you truly believe it, you win.


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David Geller

About the Author

CEO David Geller co-founded the firm in 1991 and led the creation of Behavioral Wealth Management. Recognized on numerous prestigious "top financial advisor" lists, David is an in-demand speaker for professional groups and JOYN workshops. His writings have appeared in The New York Times, The Wall Street Journal and The Huffington Post.

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