The Surprising Effect Friends Have on Our Finances

omparisons can make our finances seem inadequate even when things are going fairly well. (Image: Pixabay)
omparisons can make our finances seem inadequate even when things are going fairly well. (Image: Pixabay)

Summary

We tend to measure our financial health based on our friends—and what they post on social media.

It is human nature to judge your financial health against your friends. Just know they probably aren’t giving you a full accounting.

How we measure up against our friends and peers has an outsize effect on our financial perception, economists and researchers say—especially as people spend more time scrolling social media. These comparisons can make our finances seem inadequate even when things are going fairly well.

This effect is playing a part in the disconnect leading many consumers to feel dour about the economy despite several promising factors, such as cooling inflation, a strong labor market and a U.S. economy that grew 3.1% over the past year.

In some ways, the more downbeat viewpoint reflects financial realities. Millions of Americans are paying more in rent, while food is taking up a larger share of income than it has in decades. But the disconnect is also exacerbated by our friends and the way many of them present only the rosiest view of their finances and families on social media.

A recent report from Edelman Financial Engines surveyed more than 2,000 people regarding their attitudes about their wealth. Around a quarter said they feel less satisfied with the amount of money they have because of social media, and a third said they have spent more than they could afford to “keep up with the Joneses" on Instagram and other apps.

With two kids in college, Kristie and Jeff Gleinig said they couldn’t understand how people they followed were going on glamorous vacations and making big-ticket purchases.

Kristie, a 51-year-old business owner in Portland, Texas, said that noticing this highlight reel phenomenon then prompted her to check that same impulse in herself. She started posting less publicly on social media and instead kept her focus on the health of their local businesses—which managed to stay strong through the pandemic—and the progress she and Jeff made toward their individual financial goals, such as financing their children’s education.

“It can give you a narrow view," she said of social media. “You have to proactively reach out and look beyond social media."

The comparison trap

Time on social media creates more opportunities to feel bad about ourselves and our financial picture, said Isabel Barrow, director of financial planning at Edelman Financial Engines. The survey found a strong link between overspending and time spent on social media, Barrow said.

“It’s not always a super conscious decision," Barrow said. “We know we can’t afford this but we’re doing it out of this sense of jealousy."

Nina O’Neal, a partner and investment adviser with AIM Advisors, recalls discussing this disconnect with a friend who was using Instagram to build his business. He soon found the images he saw overwhelmed him with feelings of inadequacy.

“You can feel like a poor man quickly," she recalled him saying. “And I said, ‘you’re right. All you’re getting is a glimpse of this perfection.’ It makes you feel like you’re not doing enough."

As humans, we’re always double-checking how our own budget decisions and purchases match up to those we know. New research shows we are also always calibrating how high our perceived income is relative to them, too.

The study looked at how different groups judged their own financial well-being after learning where they ranked within the peer group in terms of income and debt load. People were happier when they thought they were doing better than their peer group. When they felt that they were at the top of this ranking, they felt less need to branch out and make other comparisons, said Bernardo Candia Gonzalez, a Ph.D. student at the University of California at Berkeley, and one of the authors of the study.

“If you realize that your position is good, then you want to brag about it," Gonzalez said. “And if you realize that your position is not good, then you are ashamed."

Getting an accurate picture

Stephanie and Trevor Bernhardt, the 27-year-old owners of two frozen yogurt stores outside of Indianapolis, said they work hard to “tune out the noise" of how the economy is doing on social media.

“Maybe it sounds bad to say that," Trevor said. “Most people, when they’re talking about [the economy], they’re really only talking about what they saw on a Facebook post or a TikTok or an Instagram Reel."

Social media sometimes gives people the false impression that your sphere of influence is larger and more diverse than it actually is, said Scott Rick, associate professor of marketing at the University of Michigan. In all likelihood, he said, people overestimate the different perspectives they’re exposed to and instead rely on the same set of influences to gauge whether or not they’re successful.

“There’s no objective answer to ‘Am I doing well? Or not?’" he said. “On social media, it’s still ‘birds of a feather flock together’ in who we follow and who the algorithm presents to us. It’s very much enforcing our worldview."

Rather than constantly recalibrating their financial plan based on those cues, Trevor said he and his wife try to treat their personal finances like they do their businesses: by analyzing a household version of a profit-and-loss statement.

The Bernhardts joined their local chamber of commerce. They said this helped them better balance their focus on their individual businesses with the health of the greater community in which those businesses participate.

“I actually tend to be pessimistic, but what we’ve seen locally, I feel hopeful," Stephanie said. “Everything in our little local market is pointing to the fact that things are growing and developing, so we’re not scared to grow and develop and build ourselves."

Write to Julia Carpenter at julia.carpenter@wsj.com

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