Money is like a lot like religion or politics; everyone has a passionate opinion about their own personal finances, but it’s not always easy to talk openly about it without social consequences. For example, the company I work for discourages open discussions about compensation and benefits. This makes sense from a corporate point of view because of the loss aversion theory. Psychologists and behavioral economists have found that we tend to feel loss about twice as intensely as we experience gain.
We can imagine how this will play out if two employees were to find out that one of them was making more than the other. The worker making less would feel twice as bad about his job as the other worker would feel good. So this would lower the overall morale in the workplace and create negative sentiment towards management. 🙁 Furthermore, some people have a cognitive bias known as the Dunning-Kruger effect where they think they’re more competent than they really are, which could lead to misunderstandings.
This is why income, net worth, and other topics related to personal finance are often seen as taboo. We are told to not compare ourselves with others. But pretending to live in a bubble can alienate us from the rest of the world and become self destructive over time. In reality it can be very advantageous to compare our income, investments, and expenses to everyone else around us. Here are some reasons why comparing personal finances is useful.
- You can get the best deals. You compare employee benefits when choosing whom to work for. You compare prices when shopping. You compare company profits when choosing which stocks to buy. So by knowing what your co-workers are earning you’ll get a better grasp of what your labor is worth. By knowing how much your friends spend on cars you’ll have a better idea of where to find the best car deals for yourself.
- You can see the big picture. By comparing your finances with others, you will be able to determine for sure if things are really expensive, or you’re just poor. 😛
- You can improve your own finances. By comparing your financial progress to others you will be able to learn from different people over time. You will know who’s really good at budgeting, and who is the most successful at investing. You can then apply newly learned practices to your own life.
But even with all the benefits of comparing everyone’s financial situation there are still some risks that we can’t ignore. For example, if someone from your job knows your salary but you don’t know theirs, then that puts you at a major disadvantage. This is why during a job interview it’s preferable to let the other party come up with the initial salary figure when negotiating the compensation. If your request is lower than what the company is willing to pay you then you’re leaving money on the table.
You can also lose respect if people find out you have cheap shopping habits. You could also be labeled as gullible and unfit to make important decisions if you’re known to overpay for things or have gotten suckered into bad investments before.
This is why money can be so hard to talk about even though it’s a necessary part of everyday life. We all want the advantages of knowing how much everyone else makes, how much they spend, and how much they’re saving. But at the same time we don’t want to share our own financial situation and feel vulnerable to judgement and potential negative consequences. Luckily there are sites such as glassdoor.com which allows employees to anonymously disclose their incomes and rate their bosses. And sites like zillow.com compare rental rates for houses and apartments across the U.S.
Of course some things can’t be compared. I can easily save 30% of my income. But that may not be practical for a family of 4 on a single income. And we all have different priorities around work/life balance and spending habits. But that doesn’t mean we should stop comparing ourselves to others entirely. Some people believe that comparison is the thief of joy. They think they can find happiness if they stop comparing their finances to others. But that only works for a little while. Reality will eventually catch up and make their lives even worse than before. So I believe the opposite. The proper way to move forward is to compare our financial situation to those around us. Make changes based on what we learned. Reassess our goals and desires. And then get inspired to improve our own finances. 🙂
Random Useless Fact:
A buttload of toothpaste is wasted every year because people don’t know they should wet the toothbrush before squirting on the toothpaste.