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Why Do You Feel Worse Off Financially?

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Gallup’s annual “Mood of the Nation” poll sampled 1,018 adults from across the United States earlier this year, and the results show that more Americans say they are worse off financially right now than they were a year ago. 42 percent of the respondents consider themselves to be worse off, 35 percent say they are better off, and 22 percent claim to be in the same financial position.

This sentiment is surprising considering the economy has been continuing to improve and the stock market (measured by the Dow Jones Industrial Average) was up 26.5 percent in 2013, the biggest annual increase in 18 years. Also, the official unemployment rate for December 2013 was 6.7 percent, the lowest rate of unemployment since October 2008, the last month before the economy began seeing the effects of the Great Recession.

Why are people feeling less financially secure about their current situation while the economy, as a whole, has been improving?

Averages don’t tell a complete story.

First, it’s clear that averages don’t apply to everyone. You can’t predict with precision any particular woman’s height when you observe that on average, women in the United States are 5 feet, 4 inches. Americans are in a better financial situation overall, but that doesn’t mean than any particular household is thriving more than last year.

But a survey of a representative sample should show that there is a positive trend.

Self-reporting and questions about feelings are not very accurate.

When the economy is improving but people’s financial lives aren’t, it doesn’t have much to do with averages. If the survey looked at people’s bank accounts and credit card statements, the results would undoubtedly be different than the Gallup poll’s results. This poll is asking people to make a judgment call. It’s a survey that asks about feelings, not about a financial reality. People don’t always know how to accurately report their financial situation.

That doesn’t mean that the survey has little value. Feelings about one’s financial situation are important, because it’s those feelings — not “reality” — that determine the choices people make about the future. It’s possible to have more money in the bank and less credit card debt this year than one had last year, but feel worse about the financial situation.

More knowledge results in more concern.

If you were blissfully unaware of the danger you were in financially last year, and at some point discovered the truth about your financial situation, it’s possible you’re more stressed this year than you were last year about money, despite being in a better position. My concern about my finances increased when I stopped ignoring my bills. The year I began keeping track of my finances, I might have reported feeling worse off financially than I felt the previous year, despite the truth that I was on the road to financial improvement.

Your friends appear to have improved.

One way people determine whether they’re better or worse off financially is by comparing their financial situation with the perception they have of their friends’ financial situations. Studies have shown that income satisfaction isn’t necessarily correlated to certain amounts of income, but the differential in income between a person and his or her friends and colleagues. In other words, a $50,000 income is satisfactory if your friends earn $40,000, but it’s not satisfactory if your friends earn $75,000.

This comparison plays a role in how you judge your financial situation. If your friends appear to have had a much more successful year than you have, you might be inclined to believe and report that you’re worse off financially now than you were the prior year.

And here’s the kicker. Your friends really are richer than you. A new research paper published this year uses the “friendship paradox” to illustrate this. The friendship paradox describes how your friends are more popular than you, because people who have more friends are more likely to also be friends with you. This is described in Slate:

People who have a ton of friends are more likely to be your friend in the first place. They have a greater tendency to make friends. People with a lot of friends drive the average number of friends up in tons of other people’s social networks because they are connected to so many other social networks…

It’s similar to going to the gym and feeling like the most out of shape person there. The reason that everyone around you is so in shape is because they’re at the gym all the time—that’s why you’re seeing them. Everyone else is at home relaxing and not getting in shape. You’re looking at a very biased sample of people.

When we compare the finances of our friends, we’re also looking at a biased sample of people. And when you see the wealth of your friends (and its growth over the past year) outshine your own, you’re more likely to feel bad about your financial situation and report that negative feeling in a survey.

The media affects your perception.

I saw The Wolf of Wall Street in a movie theater a few weeks ago. The film focused on a stock broker who committed crimes, stole investors’ money, lived a lavish lifestyle, and didn’t really get in that much trouble for his misdeeds. Much of the movie focused on his lavish lifestyle without too much criticism. Some will see the film as a glamorization of a lifestyle of excess, some will see it a a condemnation, but I think it was more successful as the former.

For all the criticism of the “one percent” in American culture over the past few years, we are still fascinated by the lifestyles of the rich and famous, as we see through films and television. While more of the middle class struggles, the more we look to the media to help us escape through fantasies about the financial life that will almost always be out of reach. More programs prey on the public’s desire to see stories about rich people, whether they’re stories of success or failure.

Either way, the proliferation of showcases of wealth in the media has an effect on the way we view our own lives, and this might also play a role in our perception of financial progress. That is, the more we see people flaunt their wealth in the media, the worse we feel about ourselves.

Do you feel worse off financially now than last year?

Here’s the question the Gallup organization asked in its survey:

Next, we are interested in how people’s financial situation might have changed. Would you say that you are financially better off now than you were a year ago, or are you financially worse off now?

I am financially worse off now. Technically, that may not be the case. I just paid a large tax bill, and my January balance sheet suffered because of that. But this is a tax bill I knew — or should have known — was coming, so my wealth hasn’t really changed. In fact, I’ve earned more income than I’ve spent over the last year, so my financially situation should have improved.

How would you answer this question?

Photo: Flickr/Gamma Man

Published or updated January 21, 2014.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

Maybe people are discouraged that the job market hasn’t improved with the stock market? A few years ago, I could understand there being more optimism because it seemed like things were improving and the skyrocketing stock market would lift everything out of the recession. Now, we are seeing that the job market hasn’t fared very well and the outlook for some people may be down. Just a thought, I definitely feel like I’m in a better place financially than I was a year ago.

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avatar 2 Anonymous

Very perceptive. I think the “friends” and the “media” options do the most damage. “It’s those blasted Joneses, Martha. Why do we have to keep up with them? Why can’t they keep down with us?”

The key is to articulate your goals and not pay attention to the distractions.

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avatar 3 Anonymous

We’re certainly no worse off than a year ago. No changes on the job front, and the stock market has been quite good to us.

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avatar 4 Donna Freedman

I’m worse off because of the Microsoft layoff — but that was my *choice* because I didn’t rush to replace my income at the same level.
But I’m emotionally better off because I’ve been able to slow down and rest a bit, and to be physically and fully present during a family illness.
Oh, and those friends who are doing better than we are? We don’t know how they’re paying for all that, do we? They could be up to their hairlines in consumer debt. Also, perhaps their own self-reporting is a bit fudged: “Things are great! We’re putting money in retirement [probably nowhere near enough], Billy just got into a great school [but we have no idea how to pay for it], our home equity has increased [but taxes and upkeep are eating us alive]…”

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avatar 5 Anonymous

I know I’m doing better financially but am way more stressed than I was last year because my goals are bigger. Before it was “pay my bills” and save a bit, now we’re tackling a mortgage, maxing out my Roth and saving for a wedding so while I’m miles ahead of where I was in 2012-13 the frustrations are bigger!

Sometimes making more income means you start looking upwards and it can be a depressing place when you feel you’re not as far along as someone else up the ladder!

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avatar 6 qixx

I’d say i’m better off than a year ago. The last year has been slow progress, but it has been progress. This year should show better improvement than the last. While the year has been mostly just paying my bills with nothing major paid off i did start adding to my 401(k).

I wonder how much impact an optimistic outlook of your finances for the next year has on how people answer this question. Are people who are optimistic more likely to state they are better off if they feel there has been no real change or progress for them?

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avatar 7 Anonymous

I don’t enjoy the “better off this year?” questions because it makes me realize that being on the downhill side of the lifecycle diminishes the importance of any such analyses. Financially, our balance sheet looks better and we did have a good time in 2013 so I have to answer yes from that standpoint. Keeping up with the Joneses was never important – maybe because we spent a long time in the military in which there is a “everybody is in the same boat” attitude that made differences seem unimportant.
Looking back, I know that being financially successful over a long period is like putting socks on a rooster. It will take a lot of work and you’ll be scratched a few times along the way, but consideration of quality over quantity should be a part of any evaluation. Here’s a simple checklist:
Positive cash flow …. check
More good days than bad ….. check
Breathing ….. check

We’re good.

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avatar 8 Donna Freedman

Yep. I just turned 56 and have never been much of a Jones-racer. Will I make less money this year? Almost certainly. Will I meet current financial goals (funding retirement, saving money, giving what I can to others) this year? Yes.
Sure, I’d like more money to leave to my daughter and to help improve the lives of others. I’m looking into a couple of possible avenues for revenue. But for the first time in, well, EVER, my focus has not been to operate at a dead run at all times. Taking time to do things that matter to me has been a wonderful gift.

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avatar 9 Anonymous

I definitely agree with media’s influence on public perception. Since they show you certain things, they can somehow distort people’s minds to be discontented with what they have. This is a natural tendency which is why people always claim that they have less without seeing the positive things happening in their life.

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