I often write a lot of words on saving money. Cut out this expensive item… consider substituting this other item… Sometimes I write about making more money. However, I very rarely go into the psychology behind making and spending money. Today, I’m going to venture into those waters… and hopefully avoid drowning.
I first read in Larry Winget’s book, You’re Broke Because You Want to Be, your income is typically the average of your five closest friends. Though Winget gives credit to Jim Rohn, the concept pans out when I look at my life (at least as long as I’m not only a full-time blogger). Winget makes a great point that he tries to surround himself with wealthy people.
Surrounding yourself with wealthy people is a solid idea, but it’s not like you can just make friends with folks who can afford to shop at 5th Avenue or Rodeo Drive overnight. I met most of my high-income friends in an expensive, private top 30 university. They had typically had fairly wealthy parents and went on to high paying jobs after school. Winget/Rohn seem to approach it as a egg – surrounding yourself with high-income people will help you get rich. I approach it like a chicken – I’m surrounded by high-income earners for the same reasons that they earned a high income.
There’s another side of coin that Larry doesn’t discuss in his book (at least that I recall). I have a theory that your spending is the average of your five closest friends. This is a completely untested theory – it seems logical to me and consistent in my own life. Why is it logical? Well my wife still thinks that I have a plasma television because “all your friends got them.” She doesn’t seem to factor in that me and all my friends love technology. My wife also expects me to get a high-end SLR digital camera soon – simply because my other friends have them. That’s an exception to the rule… I’m not looking to carrying around a murse (man-purse) full of lenses.
So if your income is the average of your five closest friends and your spending may be the average of your five closest friends, do you really have any control of your life? As always, I think the answer is yes – if you recognize these subconscious principles at work and make your conscious deal with them.
What about you? Is your income the average of your five closest friends? Do you feel that your income is the result of associating with those friends, or is it just “birds of a feather flock together?” Do you find your spending is the average of your five closest friends?
Kosmo @ The Casual Observer says
I’m not really sure I buy into this. I think that a person’s income is (roughly) the average of their five closest friends simply because you tend to have things like employer, occupation, education, and residential neighborhood in common – things that can strongly affect (employer, occupation, education) your income or are strongly affected BY it (residential neighborhood).
Surrounding yourself with doctors who graduated from Johns Hopkins and live in big mansions isn’t going to affect your income unless you start performing brain surgery. Many wealthy people aren’t particularly good and managing their finances; they simply have skills that are quite valuable.
If the argument was that you should surround yourself with entrepreneurs successful investors, I could see the logic.
There’s also the non-financial side on this. Am I going to add or remove friends based on financial reasons? No, no, a thousand times no. Friends help maintain sanity – they are priceless.
This is a tough one.
First, I’d have to figure out who my five closest friends are. The guys from high school, the guys at church, the guys at work? I don’t have any college friends I hang around with, as I got my degree much later in life than most.
Second, I’d actually have to ask some of these people what their income is. It hasn’t been something I’ve really concerned myself with. I can only tell for sure what one of my friends makes, because I’m on the committee that sets his salary.
Third, I do have one fairly close friend from high school who’s a multimillionaire. His income would really screw up the average.
I definitely don’t spend money according to what my friends spend. I buy what I want/need within my budget and plans. Who cares what “the Jones” are doing?
Corporate Barbarian says
You’re probably right. Friend A buys a new set of golf clubs, Friend B upgrades his driver, Friend C, not to be outdone, buys a new bag cart. I think peer pressure has a lot to do with our spending decisions.
It’s true, friends have a huge influence on us, that’s why they call it peer pressure. It doesn’t just exist when you are in high school and they want you to drink. Going out with friends can be a killer for your wallet. You hit up the bars with a larger group you are more likely to spend. If you go to the mall with a few people, you are more likely to spend. You have to try to have will power.
I don’t know maybe I am just weird but this peer pressure thing really hasn’t influenced my spending. Recently one of my close friends bought a Sony Bravia 52 inch LCD TV. I love the TV and would love to buy one myself but I know I can’t afford it at the moment. I even had this ugly old laptop before my company bought me a new one. My friends would laugh at me about it but I never felt like running out and buying a new one. I’m not saying I am the perfect person financially. If I overspend, it’s on me and not peer pressure.
I think that peer pressure among friends would influence spending a lot more than it would influence income.
I think your income is likely to be similar to your peers because ‘birds of a feather flock together’. You have similar environments, tastes, interests etc, and therefore are likely to end up in similar types of jobs and therefore similar income levels.
Kirk Kinder says
Hanging with wealthy people means spending more so the extra income may not actually help. Plus, the income might not come just by hanging with wealthy folks whereas the spending probably will.
I also think his rule of averages is skewed because we tend to find wealthier friends as we get wealthier. Maybe you join a country club and start golfing with new buddies. Or, you start collecting artwork where you end up associating with other art collectors – typically wealthier folks. Then the five friends tend to have more money than your friends from the municipal golf course or local watering hole.
I really don’t think this is good advice from Winget who usually provides solid ideas. Hang with the people who make you happy. And, set goals for wealth if that is what you want.
Kristy @ Master Your Card says
Interesting theory, though I sort of agree with Kosmo here. I think our income is determined by other factors than who our friends are; however, I understand the logic that success breeds success. I can see how hanging around successful people can help motivate an individual to strive for more.
I do think there is something to the spending side of this, though. Friends influence each other’s spending habits regularly. So, I see one inherent danger in assuming more wealthy friends. Hang out with the ones who spend the most money and you start spending more money…trouble is, if your income hasn’t caught up to theirs, then you’re spending more then you can afford and putting yourself in a bad position. Thus, keeping up with the Joneses was born.
Ultimately, I say pick people who will enrich your life overall, not just financially. As our relationships with people and how we interact will be what really defines us, don’t let money do the choosing for you. If being wealthy is your goal, then work towards it independently of what your friends are doing.
Darwin's Finance says
I think there might be some correlation on the income side, but I caveat that by saying that correlation is not causation per se.
My income may be similar to that of my friends because of geography. With a college degree and living in the northeast, a 6 figure salary is commonly considered “middle class”. If I tend to associate with my old college buddies or people like that and we live in the same region,it stands to reason that we’ll all make a minimum salary in the middle class (of course, the guys who went to Wall Street or law school do make a heck of a lot more than I do). If I lived in the mid-west, I’d probably be considered “wealthy” with the same income and living in a mansion for the same mortgage I’m paying now for a modest house and property. So, part of the correlation is pre-determined in my opinion and not necessarily a result of being friends with them.
On the spending side, again, there’s probably some overlap since you normally become friends with someone due to shared interests, hobbies, past experiences, etc., so if that entails golfing and joining a country club or driving sports cars, those are “expensive hobbies”.
I find we’re actually much more frugal than virtually all our friends. Don’t get me wrong, we have a few friends who are “cheap” but not frugal. They spend a lot on themselves and then tip horribly and give chintzy gifts or happen to always “have to hit the MAC” when it comes time to pay the bill. We tend to be more generous in those situations but save and invest much more than our friends.
I’m continually amazed by finding that people with high incomes (Double that of ours or more since I’m the single source of income) carry signficant credit card debt. It’s like, if you’re making 250K, how do you have credit card debt???
So, I think spending patterns are also very much determined during your formative years, perhaps even before you’re met a new friend later in your 20s and beyond.
Juliet Schor’s done research on the spending side, and it supports your idea that you spend like your friends.
She also looks at social pressure and advertising – she’s had a couple books out about it. The Overspent American was a big part of keeping me on the frugal path when I was in my early 20s.