I think I was probably eight or nine years old the first time I heard the expression "keeping up with the Joneses." At the time, I didn't really understand it--mainly because I was wondering who the Joneses were. But once someone explained it to me, I quickly understood it: "keeping up with the Joneses" was a way of describing the urge or desire to stay on par with our peers financially.
But here's the thing: I've never heard anyone use this expression in a positive way. It's always used as a way of criticizing economic decisions made for the wrong reasons. The not-so-subtle message behind keeping up with the Joneses is that you shouldn't be trying to keep up with the Joneses, whoever they are.
Based on what I'm seeing in the financial industry, the idea of helping customers figure out if they are keeping up with the Joneses is rapidly becoming a key component in online banking and personal financial management (PFM) technology. Peer comparisons are integral to pure-play PFM services like Bundle and Mint, and they are becoming part of socially-oriented rewards and coupon programs embedded in online banking platforms.
Let me be clear: peer comparisons have their place in financial services--IF they help consumers make better financial decisions. I'm all for services that help consumers compare financial product prices and features, especially if they can help consumers make apples-to-apples comparisons.
But I can't say the same thing for services that use peer comparisons to provide financial guidance or help consumers make better financial decisions. Knowing how much your peer group is spending on various budgetary categories or how much they have saved for retirement may be interesting, but it won't help you make better spending, saving or investing decisions. In fact, it might just make your financial decision-making worse.
Personal financial management isn't like baseball, where the measure of success is relative (score more points than the other team). In baseball, a team can play terrible and still win; it just needs the other team to play even worse than it did.
Personal finance couldn't be more different. If everyone around you is undersaving or drowning in debt, it doesn't mean you're all good just because you're only "sort of" undersaving or drowning in debt. You aren't going to be successful financially, even though you are doing better than everyone else.
For the most part, the rules for making financial decisions are simple and absolute. Any particular decision should either increase your wealth, improve your monthly cash flow, or lower your financial risk.
And the metrics for measuring how well you are doing in these areas are already well-established: things like debt/income ratios, savings/expense coverage ratio (# of months), income replacement ratio for insurance, etc. Savvy financial planners use these metrics every day to help clients measure how they are doing.
What your peers are doing (or not doing) financially is irrelevant--and potentially misleading.
Keeping up with the Joneses isn't the way to financial success--and technology tools that attempt to leverage peer comparisons to help consumers make financial decisions do so at their peril.
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Posted by: Finance Dissertation | 06/11/2011 at 05:07 AM