This article is an excerpt from the Shortform book guide to "Unscripted" by MJ DeMarco. Shortform has the world's best summaries and analyses of books you should be reading.
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Why do some people pretend to be rich by spending money on luxury items and premium experiences? How does trying to project wealth prevent you from creating it?
For some people, it’s more important to create the illusion of wealth than to acquire actual wealth. However, projecting wealth and generating wealth are mutually exclusive. When you spend money to create the illusion of wealth, you’re sabotaging your long-term financial prospects.
Here’s why pretending to be rich is a bad idea.
Why You Shouldn’t Try to Look Rich
Some people believe that it’s more important to present the appearance of wealth than it is to actually acquire wealth. As a result, they mismanage their money, spend more than they earn, and create debts that prevent them from accumulating wealth. DeMarco argues that pretending to be rich by buying things you can’t afford without considering the impact it has on your financial security always leads to poverty.
(Shortform note: According to Jonathan Haidt (The Happiness Hypothesis), people are motivated to look wealthy because they assume it will make them happy. However, the desire to project wealth limits your ability to feel intrinsically happy because it leads to an endless competitive cycle. You feel happy when you buy something that projects wealth. But, when someone else buys something more expensive, it devalues your purchase and leaves you dissatisfied. The only way you can maintain happiness is to continue purchasing increasingly expensive things so no one outdoes you.)
Spending Mindfully Prevents Lifestyle Creep
Even high earners risk spending more than they earn and ending up poor—research shows that the more you earn, the more likely you are to increase your spending. This is due to a phenomenon called lifestyle creep: As your income increases, you feel more entitled to waste money on things you formerly viewed as unnecessary treats or luxuries. This increase in spending happens incrementally, so it’s often difficult for you to recognize when it’s happening.
Further, many Americans get stuck in the debt trap that DeMarco describes because of the way they’re targeted by credit card companies. Credit card companies profit from interest payments and penalty fees—meaning that every time you fail to pay your full balance, they make a profit. Unfortunately, this business model encourages some disreputable companies to target vulnerable consumers, offering low interest rates to entice low-income earners and including hidden fees to maximize profits.
Financial advisors suggest that becoming conscious of your spending habits and sticking to a budget will curb your tendency to overspend and accumulate debts—common advice includes tracking your spending habits and eliminating all unnecessary expenses. In contrast, Ramit Sethi (I Will Teach You to Be Rich) suggests that if you focus on spending mindfully, you can quit overspending without eliminating expenses that are unnecessary, but bring you joy—for example, by indulging in fine wine. To spend mindfully, split your expenses into four areas, decide how much you want to spend in each area, then allocate a portion of your income to each:
– Fixed costs (rent, living expenses)
– Investments (savings and retirement)
– Savings goals (vacations and large expenses)
– Guilt-free spending (anything that makes you happy)
Sethi suggests setting up a system that won’t let you spend more than you’ve allocated to any of these areas. He argues that this process is more effective than budgeting or eliminating expenses because you don’t waste time tracking where each dollar goes. In addition, you give yourself permission to spend a portion of your income in any way you wish. While this goes against common financial advice, you’re more likely to stick to your financial goals if you don’t constantly deprive yourself of the things in life that bring you joy.
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- Why the only way to achieve financial success is to adopt an entrepreneurial mindset
- Eight beliefs about money that prevent you from achieving wealth
- Actionable ways to adopt an entrepreneurial mindset
