Financial Mentor

In 1954, renowned psychologist Leon Festinge developed the social comparison theory, which states that individuals compare themselves to others in order to understand themselves better. He said, “There exists, in the human organism, a drive to evaluate his opinions and his abilities.” So it’s not that we want to compare ourselves to others—we need to.

This drive explains our collective compulsion to post our latest achievements on Instagram. It’s not enough to have something—an opinion, new car, designer purse—or achieve something—promotion, marathon, degree. But as humans, we need to let people know about that “thing” and compare it to others.

In fact, studies show that we are only “happy” when we are comparatively better off than someone else. So if you buy a new house, but your co-worker Jim buys a bigger, nicer house, you won’t be as happy about your purchase. It’s illogical, but it’s a reality. And it also leads to poor financial decisions.

So how do you break free? Recently, I attended the Morningstar Investment Conference in Chicago, and Sarah Newcomb, who is a senior behavioral economist at Morningstar, gave the answer: find a financial mentor. Since we are naturally going to compare ourselves to someone, make sure they push you toward financial success.

Newcomb says to begin by thinking of someone you know and admire who is financially successful, but make sure that their level of wealth is practical (e.g. not Warren Buffett). Next, write down a couple of sentences that explain specifically what you admire about their financial situation.

For example, you may have a modest income and look up to someone who has wisely stewarded their resources over the years, contributing healthily toward retirement and paying off their mortgage. Or you may have a higher income and look up to someone who is very charitable and paid for their kids to go to college.

Most importantly, Newcomb says to consider what behavior allowed them to achieve such financial success and what personal qualities drive this behavior. Do you also possess any of these qualities? What immediate action can you take to put your financial life on a similar trajectory?

Obviously, wishing your life were like someone else’s will not magically change your circumstances—you still have to make it happen. But this exercise will prime your mind to make better financial decisions and move in that direction. It creates a financial North Star—a healthy way to compare your financial life to someone else that encourages better financial decisions.

 

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at.