Much of today’s personal finance advice aims to help consumers tackle specific, tangible problems. Unfortunately, many of these problems are just symptoms of deeper issues, and resolving them doesn’t address their root cause.
Instead of discussing a symptom, this piece targets one of the most significant contributors to financial instability: the consumerist mindset that drives people to accumulate material possessions in pursuit of happiness and security.
Let’s explore the flaws in this line of thinking, its long-term consequences, and some practical tactics to shift your mindset.
🛑 Disclaimer: This is an opinion piece, so forgive me for getting on my soapbox. I’m a personal finance writer, after all. Urging you to be more responsible with your money is part of my job description.
Dispelling the Common Illusion of Wealth
When you imagine a wealthy person, what does your mind conjure? I’d bet the image involves someone wearing designer clothes, driving an expensive car, or living in a big and fancy house. Those things definitely come to mind for me.
These all seem like indications of wealth since the richest among us flaunt these luxuries. However, there are many more people indulging in them than can realistically afford to do so. Most of those Instagram pictures of people indulging in the finer things captioned “Living my best life” should really read “Living beyond my means.”
In 2022, 39% of Americans reported having overspent to impress others[1]. Of course, those are just the ones who have the self-awareness to catch their bad habit and the humility to admit it.
These people primarily overspent on what most of us see as the trappings of the wealthy, especially material possessions. For example, that included:
- 16% who overspent on clothes, shoes, or accessories
- 6% who overspent on expensive houses
- 5% who overspent on expensive cars
People who prioritize these possessions may appear wealthy, but they’re really just hamstringing their finances. The only way to pay for these purchases when you can’t afford them upfront is to finance them, and nothing compounds the negative impact of irresponsible purchases more than putting them on a credit card.
In reality, wealth tends to look more modest than you’d expect. It requires living below your means, avoiding unproductive debt, and consistently investing your savings into assets that produce income or appreciate in value.
📗 Learn More: The Millionaire Next Door covers a lot of fascinating data on this subject. Check out my review of the book to see if it’s something you’d be interested in reading: The Millionaire Next Door Review: Best and Worst Advice
Long-Term Consequences of Overspending
Many modern Americans live paycheck-to-paycheck due to economic factors beyond their control. The general cost of living has risen steadily for decades while wages have failed to keep pace.
As a result, it’s arguably more challenging to be financially successful than in years past. However, discretionary spending decisions are still the most important factor driving the financial health of many American consumers.
We tend to dislike the thought that our finances depend on how disciplined we are with money. Not only does that force us to question the luxuries we may feel we deserve, but it also feels unpleasant to shoulder the blame for our failures. It’s much more comfortable to chalk our issues up to stagnant wages, student loan debt, or rampant inflation.
While understandable, that attitude is ultimately counterproductive. When conditions are unfavorable, it’s even more important to focus on what you can control and take responsibility for your finances.
While a minimum level of spending is obviously unavoidable, what you buy is still largely up to you. To build wealth, you must avoid getting caught up in the consumerist obsession with accumulating expensive material possessions.
Let’s look at a couple of practical examples using actual numbers from the Bureau of Labor Statistics’s (BLS) annual Consumer Expenditure Survey to demonstrate the impact seemingly minor spending decisions can have on your long-term financial trajectory.
Chris Consumer 👨
Chris Consumer enters the workforce at 22 years old. After taxes, his annual salary is $46,593, the average for households that earned between $40,000 and $50,000 in 2021.
Chris isn’t excessively spendy, but he finds budgets stressful and feels the need to keep up with the perceived lifestyle of his peers. He wears the latest fashion, leases a new car, and rents a fancier apartment than he should in order to impress them. As a result, Chris spends the average amount for his income, which is $49,498 per year.
Unfortunately, that means he accumulates $2,905 in debt annually.
Let’s assume Chris spreads that over a mix of credit accounts, including credit cards and installment loans.
For simplicity’s sake, we’ll ignore inflation, say Chris’s salary and living expenses remain fixed, and assume his debt grows by 5% per year, compounded monthly. However, he would probably accrue significantly more interest in reality since credit card rates average 20%[2], auto loan rates average 6%[3], and his credit score would be below average.
Sammy Saver 👨🦰️
Sam Saver also enters the workforce at 22 and negotiates for the same salary as Chris. However, Sam puts together a simple budget and keeps his annual expenditures to $43,069, the average for people who earned $30,000 to $40,000 in 2021.
Sam doesn’t do anything groundbreaking to reduce his cost of living. Mostly, he rents a more modest apartment closer to his office and drives a more fuel-efficient car. Also, he eats out less, buys fewer accessories, and takes less expensive vacations.
As a result, Sam saves and invests a very modest $3,524 per year into an S&P 500 index fund. On average, it generates a 7% annual return. Once again, we’ll ignore inflation and assume his earnings and expenses remain fixed.
Financial Results ⏳
Eight years later, Chris and Sam are both 30 years old, but the difference between their financial positions is significant. Chris has accumulated $31,444 in debt, while Sam has $36,663 invested.
Because Sam spends just $535 less than Chris each month, his net worth is $68,107 higher after eight years. Even more importantly, he’s on track to have $966,519 invested by the time he turns 65 years old.
Before Chris can even start trying to catch up with Sam, he must change his spending habits and dig himself out of debt. If it takes him five years to do so and get back to a net worth of zero, Chris would have to invest roughly $9,600 per year to catch up with Sam by age 65. That’s almost three times as much in annual savings!
If Chris couldn’t save that much and only managed to match Sam’s $3,524 annual savings, he would have just $355,292 invested by age 65. That’s a whopping $611,227 less. To catch up with Sam, Chris would have to keep working until age 78 due to his overspending in his younger years.
How to Change Your Spending Habits
Many people spend too much due to a simple lack of awareness. They find money uncomfortable and don’t want to look at their bank account, so they operate on autopilot. I sympathize, but your finances are too important to leave to chance. You must create a budget and hold yourself accountable.
If you fear you’re currently on the wrong financial trajectory and want to change, start by tracking your expenses. Connect your debit and credit cards to a budgeting tool that can record your activities automatically, then review them after a month or two.
That should give you enough data to start making informed adjustments. Look for ways to cut your spending that won’t compromise your happiness. Most people new to budgeting can find some easy wins, like subscriptions they no longer use.
Of course, those reductions might not be enough to get you on track with your financial goals, so the next step should be to sort out your priorities. Ask yourself questions and figure out what’s important to you.
- Which discretionary purchases bring you legitimate happiness, and which are you making for the wrong reasons?
- Is the satisfaction that your guilty pleasures provide in the short term worth what they mean for your finances in the long term?
Don’t expect this process to be easy. Reducing your spending can impact your lifestyle, the kind of people you spend time with, and how you view yourself. Expect meaningful financial changes to require substantial introspection and personal growth.
Whatever action you need to take, get started as soon as possible. As we’ve established, even a seemingly minor habit of overspending on material possessions can have a life-changing impact on your finances. The longer you allow it to continue, the harder it will be and the longer it will take to turn things around.
