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Not All Social Media Comparison Is Bad for Your Financial Health

Sarah Newcomb, Morningstar's director of behavioral science, discusses the pandemic's impact on financial habits and the effect of social media on financial well-being.

Sarah Newcomb, Morningstar's director of behavioral science, joined The Long View podcast this week to discuss financial literacy, education, and wellness--and the pace at which behavioral science is permeating the investing industry.

Newcomb further offered her thoughts on the efficacy of "rules of thumb," the best timing for financial education, changes to saving and spending habits during the pandemic, and how social media influences financial well-being. Emphasizing the significant difference between aspirational comparison and evaluative comparison, Newcomb explained that not all social media comparison is detrimental or demoralizing.

Here are a few excerpts on the impact of social media use and the global pandemic on financial well-being from Newcomb's conversation with Morningstar's Christine Benz and Jeff Ptak:

How Does Social Media Impact Financial Well-Being?

Benz: You wrote a piece entitled "Is Instagram Making You Poor?" for Psychology Today a few years ago. How do social media and comparing ourselves to others work against our ability to save for the future and even think about the future?

Newcomb: Social comparisons is a big topic. We all know that keeping up with the Joneses is a huge resource suck on many people. But it can be difficult not to do it because we're social creatures. Social comparison theory states basically that we all need to know where we stand. We want to know, how are we doing at this life thing? And when we don't have an objective measure by which to judge ourselves or our progress, what we do is we look around us for a similar other to compare ourselves with. This is such a natural inclination that we don't even notice ourselves doing it. And when we compare ourselves to others, I wanted to know how social comparisons were affecting people's bottom line. So, I did a number of surveys, asking people about who they compare themselves with, how often, whether they're comparing themselves with people they think are higher on the socioeconomic ladder or lower. And then I asked a series of questions about their financial well-being. So specifically, I was asking them about their emotional experiences with money, how often they felt joy, peace, satisfaction, and pride, versus how often they were feeling anger, stress, helplessness, and anxiety with respect to their money.

What I found in analyzing the results of this was that, first of all, most people are comparing themselves financially--no big surprise there. And in every income group, most people are comparing themselves with those that they believe are better off. Not everyone, but more than half of the people in every income group are looking up the socioeconomic ladder when they compare themselves. Then I looked at the correlation between that upward comparison versus downward comparison and the emotional experience with money. And it was no big surprise to me to find that the people who were comparing themselves with those they thought were doing better, were experiencing more stress, lower satisfaction, and not only that--they were spending more and saving less because they were trying to reach that higher level or live the lifestyle that they were looking at and admiring.

We end up with a situation where this need to compare ourselves may actually be driving us to lower financial health because the people that we tend to compare ourselves with are doing better, and so the natural comparison makes us feel bad. In order to deal with that psychological pain, some people spend in order to try to achieve the lifestyle that they're admiring of the person higher up the ladder.

There was, however, in this research, a very interesting finding. There was this one little group of people that said they compare themselves not to their friends or families or neighbors or celebrities, or even themselves at a previous time in life. All of those people who were making those comparisons, which was the vast majority followed this pattern, where if they looked up, they felt bad; if they looked down, they felt great. And most of them were looking up and therefore feeling bad. This one little group compared themselves with a financial role model. Regardless of whether they were looking up or down the socioeconomic ladder at that role model, they were feeling consistently more financial satisfaction, regardless of their income level and regardless if they were looking up or down the ladder.

It illustrates, I think, the difference between what I would call evaluative comparison, which asks the question, "Do I measure up right now?" And aspirational comparison, which asks the question, "Can I follow in their footsteps and be where they are in the future?" This, you may have noticed, is a future-oriented question. So, it also ties into that long-term view. But when we look up the socioeconomic ladder and compare ourselves with people that we think are doing better, we may think we're being aspirational in doing so. But if the question you're asking yourself is, "Do I measure up?" And you're looking up the ladder, of course, the answer is no. You don't measure up because you're choosing a target that's doing better than you are, at least you think they are--you can't see their debt.

But those who choose a financial role model don't ask, "Do I measure up now?" They're looking at someone who has made decisions that they want to emulate, and they're asking, "What can I do to be more like them? How can I follow in their footsteps?" Then you can say, "I don't measure up now, but that's OK, because I can do what they've done." And that's the difference between true aspirational comparison, which can be very healthy and adaptive and motivating, and evaluative comparison, which is maladaptive and unhealthy and demotivating.

How Have Financial Habits Changed During the Coronavirus Pandemic?

Ptak: Let's talk about the pandemic. Some consumers were able to use the pandemic period as an opportunity to repair their household balance sheets. American savings rates soared, especially in the early part of the pandemic. The question is, how can those consumers hold on to those healthy habits, even as the economy has opened back up and there are more spending opportunities?

Newcomb: I was so happy to see that finally Americans were saving, but it took a crisis. I think there's a couple of things we have to try to remember in order to hold on to this new habit of saving. First of all, remember how scary it is to realize you don't have solvency--the state of people's emergency funds in this country is atrocious. We all have probably been exposed to one stat or another that, you know, the majority or at least 40% of Americans couldn't come up with $400 at a moment's notice without borrowing it from someone or going into debt or putting it on credit. That is a very alarming statistic because that means we walked into this pandemic largely insolvent. Many, many, many households don't even have short-term solvency, and you can't even think about long-term solvency without short-term solvency.

When people are afraid, they save, and then when they're not afraid anymore, they spend. I'm all for consumer confidence; I think that's great. I'm not antispending. But I do think that we have to first of all remember how scary it is to not have solvency, remember how scary it was if you were one of those people that decided you absolutely needed to start saving, and you wished you had been doing it all along. Try to remember that feeling, because you don't want to be there again, and you don't have to be there again. Then on the other hand, really holding on to that feeling of how good it feels, to have a bit of solvency, to have some slack, to have some security. I generally don't talk about emergency funds in those terms--I think in terms of months of safety. How long could you go on your liquid assets, if you lost your income today, just with the money that you could get your hands on in a week or less with no penalties? How long could you maintain your current lifestyle before you'd have to make changes? That's your safety net. It tells you how much freedom you have to be able to handle a shock, or to rebuild after a shock, or to make a major transition.

I think that what the pandemic really exposed for many people was a basic need for solvency. I hope that we will really emotionally remember how it feels to be insolvent, and then start to really appreciate how good it feels to be solvent. For those of us who are not saving enough, generally it's because saving doesn't feel as good as spending. We do things that feel good to us, we do cost-benefit analysis all the time. And if what you choose is to spend, then that's because spending won out in your mental cost-benefit analysis. The emotional, nonfinancial benefits outweighed the financial costs. And your overall utility of spending in your mind's eye was greater.

So, in order to keep this habit of saving, we have to love saving, we have to like the feeling of having money more than the feeling of spending money. I think really leaning into that is critical. Many people don't--they feel like it makes them greedy, and we have all these negative connotations around money and greed in our society. The idea of really sort of savoring that feeling of having money might feel very strange and even bad to some people, especially those who haven't had money. So, I think it's important to lean into the feelings of security and stability and the peace of mind that having money brings, to help you to counter the temptation to go and get the short-term payoff of that new thing that you want. I'm all for spending so long as you maintain that solvency that allows you to sleep at night, and to think long term and to bounce back when there's another shock, because there will be one.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.