Last week, I caught up with a good friend who lives in New York City, has a family, and is struggling to decide what to do on some big financial questions. Despite being a rockstar saver and earning a good living, when he looks at home prices, he suddenly feels poor. He’s looking at very basic houses outside of Manhattan that cost multiple millions, and essentially knows that buying one of them means working forever, if he decides he can even afford one in the first place.
We can relate to that feeling. Before we left the big city we used to call home, we felt like we’d never be able to afford an actual house (though, admittedly, our definition of “afford” was quite different from the bank’s — and it’s the same for our friend now). The price of housing was no small factor in our decision to move to the mountains, even though where we live now is far from cheap. (#mountaintax)
But we remember feeling “poor” in more ways than one when we lived in the city, while now, we comparatively feel “rich,” even though not much has changed in those years in terms of our earnings. (Assets are a different story, since we’re socking money away like crazy for early retirement.)
But our friend’s hard decision is a great reminder of how wealth is relative, and our perception of our own is extremely contextual, based largely on our surroundings.
The Theory of Wealth Relativity
There are high cost of living areas, and low cost of living areas. But that’s not the full story. Much of cost of living is calculated based on housing prices, with smaller components of living expenses like tax rates and food and energy costs factored in. But then there’s the giant x factor: the cultural factors that might dictate higher spending. (Or, in physics terms, since we’re talking relativity, you can think of them as the massive objects exerting gravitational pull that warp your space-time or, you know, make you spend more.)
In some places, the public schools are bad, for example, and it’s simply expected that anyone who possibly can will send their kids to private school. Or it’s a city where no one has room to entertain, and so getting together means meeting up at a bar or restaurant with high prices.
I remember when I first moved to the city we last called home. Suddenly, hanging out with girlfriends meant spending $16 for yoga, $8 for juice or coffee afterward — oh, and you couldn’t show up for a cool yoga class in some ratty old sweats. Thank god I never got suckered into buying Lululemon, but I definitely had to invest in a few pieces that wouldn’t embarrass me, essentially so that I could roll around on the ground and sweat in them.
Then once Mr. ONL and I were together, we lived in a fairly unattractive but rent controlled apartment for years that let us save bundles of money, but we were embarrassed to host friends there. The result: seeing friends meant going somewhere with $12 drinks and $20+ entrees. (You can see how we slid into our baller years without even realizing it.)
Now, looking back in hindsight, we realized that we lived in one of those places where you exist inside this bubble without realizing that it’s a bubble, and in it, all sorts of wants masquerade as needs. “We’re having people over. I need to stop by the cheese shop.” (Because less expensive supermarket cheese is apparently not worthy of our friends.) Or “I’m dying for something healthy. Let’s meet at that macrobiotic place.” (Because I can’t just make a salad at home.)
When you’re inside the gravitational field of a place like that, it’s easy to feel like you must spend money on this stuff, or at least you must if you don’t want to be a hermit stuck at home. And when all that money’s going out the door, it’s easy to feel poor fast, regardless of what housing prices might be. When those home prices are high to boot, the feeling is more like being permanently stuck, with a decent home forever out of reach.
The Perception of Rich and Poor
By global standards, few of us in the U.S. are truly poor — type your income into the Global Rich List for a good reality check. (I link to that site often because it’s an important reminder of how invisible our privilege is to us.) We can take for granted things like clean water, available emergency medical care even for the uninsured and food assistance for people who have nothing to eat.
But despite virtually all of us being rich in global terms, the perception of whether we feel rich or poor is determined largely by three factors beyond our own income and assets:
- The cost of living where we live
- The culture of the place
- The impact of our immediate peer group
Mr. ONL’s answer to what made him feel poor in the city was the cars. We didn’t see many Pontiacs on the road, but instead learned to spot exotic cars like Aston Martins and Maybachs with no trouble. That falls into the second category of the culture of the place, since we certainly weren’t friends with anyone who drove a Maserati or a Bentley.
For me, housing prices were a pretty serious bummer, but at least until the 2008 crash, I just accepted that we were going to be renters forever. The bigger factor for me was peer group related: seeing the women I worked with wearing expensive clothes, getting expensive haircuts, leaving their kids home with their nannies, and going out for lunch at pricey places often. Even though I knew that their salaries alone couldn’t have been covering that, I still felt self-conscious about wearing clothes from TJ Maxx and packing my lunch most of the time. Or having to drop $40 on yoga and juice just to hang out with my friends from work.
Eventually I started doing the expensive haircuts, and was in this completely ridiculous situation where I spent $100 on a haircut and yet felt poor because home prices felt forever out of reach. Yet somehow that feeling also made sense because the housing bubble was so out of control that not getting the $100 haircuts wasn’t going to make the difference in whether we could afford a home. We just needed the housing market to correct itself, which it did, unfortunately taking the whole world economy with it.
The Impact of Place
When we moved from the city to the mountains, we assumed that we were just trading one high cost of living area for another, and that our spending wouldn’t shift dramatically. But we were looking only at the first of those three factors, and didn’t take into account the culture of the place and the power of our peer group.
Where we live now, there is just generally more space, so even if a person doesn’t have a large enough home to feel comfortable entertaining, there are endless free outdoor options for meeting up — parks, trails, national forest lands, you name it. And because most people move here to spend more time outdoors, it’s perfectly natural to suggest hanging out outside. No one worries in suggesting that that they might offend someone who’s not outdoorsy. That just isn’t a thing here.
It’s also not a place where anyone moves to advance their career or get rich, because career options are basically limited to hospitality industry jobs that pay the bills and not much else. So there’s not the same display of wealth like we saw in the city, or the same expectation that get-togethers will involve expensive activities. Most daytime activities with friends involve hikes or bike rides, and most evening affairs are of the “I’ll have chips and guacamole, you bring beer” variety.
The result: When we moved, we went in a very short period from feeling relatively poor to feeling relatively wealthy. From feeling like we had no choice but to spend a lot to feeling like saving was the default.
Thinking Beyond Cost of Living
We’re not suggesting that everyone move to the mountains. But it is worth considering whether where you live matches your values and your financial goals. Housing is a huge part of most people’s expenditures, and it is simply more costly in some places, including relative to salaries in that area. But in terms of feeling like you have plenty or like you’re scraping by, don’t forget to look at the other factors in the local culture that impact that stuff too. And consider your own peers, and whether they support good financial habits or bad ones.
Have you had the experience of feeling relatively wealthy or poor based on where you live? Has anyone else moved by choice to a place with either an objectively lower cost of living or just a culture of less spending? Or done the opposite — moved to the pricier place but managed to resist the temptation to spend more? Let’s continue the conversation in the comments!