In Behavioral Finance, Investing


The following post was written by Tim Church, PharmD, BCACP, CDE. This is the second post in a 3-part series about developing a net worth mindset.

Tim Church is a clinical pharmacy specialist in primary care at the West Palm Beach VA Medical Center and is the author of When Eating Right Isn’t Enough: The Top 5 Medications to Control Your Type 2 Diabetes

As many of you already know, Tim is my co-author on Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth.

In Part 1 of this series, I discussed the idea of having a net worth mindset and how it can help you be successful with your finances.

Although I portrayed this as a simple philosophy, if you’ve always had a live-for-today type of mindset, it can be a tough transition. In addition, there are barriers and challenges that make it difficult to keep your net worth in focus.

Barriers to a Net Worth Mindset

In Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt, and Create Wealth, I wrote about a pharmacist in her 30s named Serena. In 2012, with the help of a side job, she was earning an incredible income of over $140,000 per year, well beyond the national average salary at the time. From the outside it looked like she was doing well financially. She had a nice three bedroom townhouse, drove a newer Mercedes Benz, and was traveling all over the world. However, the reality was that she was broke. She had outstanding student loans, credit card debt, a 401(k) loan, and the value of her home was less than what she owed. Barely able to make all the minimum payments, she suddenly lost her side job, and her home went into foreclosure.

Lifestyle Creep

Parkinson’s Law is a well-known principle that basically says work will expand to fill the available time for completion which is why having deadlines are so important. When applied to personal finance, it translates to: your expenses will rise to the level of your income. In other words, no matter how much money you make, you will spend it.

Many people, like Serena, tend to adjust their lifestyle in step with their income. Instead of putting more money toward savings when income goes up with a raise or additional job, they buy bigger, better things and experiences. That’s why this application of Parkinson’s Law has also been referred to as lifestyle creep.

This is the big reason why many pharmacists, despite making a great income, are living paycheck-to-paycheck. When you’re living like that, it’s very difficult to contribute to your net worth.

There are two big reasons why lifestyle creep occurs: present bias and the need to compare.

#1 – Present Bias

Would you rather buy a $398 Kate Spade Cameron Street Marybeth handbag that you get to have today or put that same amount of money into a Roth IRA that you won’t see again until 30 years from now? (If you don’t like Kate Spade handbags, just substitute it with something you like). Which option is going to bring more happiness today?

By nature, we are very impulsive and make decisions that will make us feel good in the present instead of ones that promote some larger reward in the future, especially with our finances. This phenomenon has been to referred to as hyperbolic discounting or present bias. Although many have the goal to attain financial freedom, their behaviors often don’t align.

Paying off debt or saving money is not going to give you the same feeling you get when you purchase things off Amazon or bite into a burger (fun fact: Tim Ulbrich has never eaten a burger). There’s no dopamine surge when your employer automatically takes money from your paycheck and puts it in a retirement account. That’s why it can be tough to maintain a net worth mindset and why present bias is your biggest threat.  

#2 – Comparing Yourself to Others

How many times a day do you get bombarded on social media by people in your network showcasing their exotic trips, new cars, exclusive restaurant outings, or how amazing their life is in general? Does it ever feel like they are trying to do everything bigger and better than you? How does this influence you?

There’s a lot of pressure to maintain a certain image, especially among your network, and many have a desire to impress and announce “I’ve made it!” typically through the demonstration of status symbols or experiences. As a result, people focus on upgrading their lifestyle to match or exceed others instead of their financial future.

This so called “keeping up with the Joneses” mentality, or in today’s society a Kardashian, is associated with the live-for-today mindset and can be very counterproductive to growing your net worth.

If you’re not reaching your goal percentage of income going toward net worth, identifying the barrier in your way is the first and most important step.  

In part 3 of this series you will learn some tips and strategies to overcome these barriers.

What barrier(s) is(are) preventing you from increasing your contributions toward your net worth and why is it so tough to overcome?

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