Wednesday, October 18th, 2017
Look around your neighbourhood when you drive to work. Notice how many shiny new, and even luxury cars, are on the road around you?
Have you ever questioned how your colleague can afford new shoes, or how your brother and his family are taking their third vacation this year?
What about all that dining out they're doing, too? Where are they getting the money? You don't understand, because it feels like you and your family are barely making it. You don't think they make more than you do, yet they seem to be leading a jet-set life that, quite frankly, you sometimes secretly envy. It's OK – you're not alone.
Smoke and Mirrors
It used to be that if you were poor, you looked poor. If you were rich, everyone knew you were rich. But with the creation of credit, and with today's cheap credit, it's easy and enticing to live like a big shot while only paying the interest on that rising debt.
Keeping up with the Joneses (or FOMO) is a real thing. In a recent study, economist and University of Alberta professor Barry Scholnick found that for every $1,000 your neighbour wins in a lottery, your likelihood of going bankrupt increases by 2.4%. Good thing your neighbour isn't likely to receive a windfall like that anytime soon, but it illustrates the phenomenon isn't just an urban myth.
Laurie Campbell, CEO of Credit Canada, says: "Keeping up with the Joneses has almost become a mantra or way of living, especially with the rise of social media. We live in a world where we don't just compete with people in our immediate circle, but now we can compete with complete strangers. And this need doesn't just backfire on people with limited income, it can create very real and big problems for people with six-figure incomes too."
The Dangers of Keeping Up
The trend to keep up is so dangerous that recently the Financial Consumer Agency of Canada (FCAC) warned us that too many Canadians are using their homes as ATMs. Those using a Home Equity Line of Credit – or a HELOC as many know it – skyrocketed nearly 40 percent since 2011. And the FCAC is worried about the 40% that are only making interest payments on these lines of credit. That means, at the end of two, three or more years, these debts aren't getting paid off.
But why do we fall prey to trying to keep up with others, even if we know it may be funded by debt? Campbell says Canadians are more susceptible because "not only do they believe they can afford it and deserve it, but they also feel like they need to have it to maintain their 'level' in society."
Campbell offers these tips to help you arm yourself against unreasonable financial comparisons: