How Rich You Are vs How Rich You Feel

There is often a difference between how rich we are and how rich we feel. You know the two extremes - the wealthy person wearing broken shoes to save money, and the poorer person with the latest iPhone and Gucci wallet.

We’re going to explore the difference between reality and feeling, and why it’s important to align them. By the end of this piece, you will have five questions to ask yourself about whether you are richer than you feel, or feel richer than you are. The idea is to become more aware of your true wealth, and to act accordingly.

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The Delusion Gap

There are two kinds of problem here:

i) feeling poorer than you actually are (deluded pessimist); or

ii) feeling richer than you actually are (deluded optimist).

You might be slightly deluded and not notice. Or you might be conscious of this mismatch and not know how to fix it. Either way, being deluded is negative.

If you’re a deluded pessimist, you are constantly cutting costs, rather than seizing opportunities to live the best life you can. You can afford to spend more, but don’t believe you can.

As a deluded pessimist, you’ll look back one day and realise you never actually did what you wanted to do with your money, because you were too focused on the money itself. If you can’t use money to live the life you want, there’s no point having it. You will regret not spending more.

If you’re a deluded optimist, you have the opposite problem – you will feel richer than you actually are. At some point, you will realise that you don’t have enough money to continue the lifestyle you’re living and will wish you had saved (and invested) more. You will have a different type of regret – this time for spending beyond your means.

If you are deluded, either as a pessimist or an optimist, there will be a moment where you regret the mismatch between reality and your feelings. If you worry too much about spending money, you have a lack of freedom – if you worry too little, you have a lack of money. Both are better avoided.

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What Causes Delusion?

You might ask why some people are deluded optimists, and others are deluded pessimists. There are clear reasons.

Firstly, our upbringing. What have friends and family taught us about money? Some of this is cultural – certain cultures are more likely to be deluded optimists, and others deluded pessimists. It takes hard work to shake off the life that you’re used to and be in line with the life you can afford.

Delusion is also influenced by how we see ourselves. If our happiness stems from the opinions of others, we are more likely to waste money on flashy items we don’t actually need. If we derive happiness from our own opinions, we are more likely to buy what we can afford.

This idea plays into the concept of lifestyle inflation. Most people spend more as they earn more, and in some cases their living costs rise faster than their salaries.

Once you’re on that path, it’s hard to step off it. There’s always somewhere else to spend your money – another holiday, a new pair of shoes, a new car, fancy restaurants, a new phone. Instant gratification is an addictive trap for the deluded optimist.

The deluded pessimist has the opposite problem – they have trouble actually spending money. They have made money through prudent saving and investing, so it’s difficult to bring themselves to spend it. But to live their best life, they need to spend it, with intention.

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Money is useful insofar as it leads to greater choice. Think about the type of life you want vs the resources you have. And then plot how you can get the best value over time. Think not only about your decision today, but also about what the ‘future you’ in 10, 20 or 30 years would want.

Sometimes that ‘future you’ would look back on the ‘present you’ and tell you to spend more. It would tell you to be less pessimistic and spend more today to create a better life. And sometimes the ‘future you’ would tell the ‘present you’ to spend less – to save and invest so the ‘future you’ has more comfort.

Although we can’t know the future, the ideal strategy is to have a slightly improving lifestyle over time, within the constraints of what you can afford. It’s all about getting the best value over time with what you spend.

Drawing it all together, you can ask yourself the following questions to avoid delusion:

1. Are you financially deluded? If so, are you are a deluded optimist or a deluded pessimist?

2. What would the future you say about the financial decisions you are taking today?

3. What easy changes could you make today to put your spending in line with what you can sustainably afford?

4. Are you intentional in your spending? Are your financial decisions governed by what you really want, or buy some external factor?

5. Are you using the money you have in the best possible way to help you be happy?

By reflecting on these five questions, you’ll be on the way to matching up how rich you are with how rich you feel, and as a result you’ll avoid the most common financial problems. Don’t be deluded – make sure you feel as rich as you are, and that you are as rich as you feel.