Don’t spend extra money to “move up a rung” among your peers by buying a new house, car, or social circle

24. Don’t spend extra money to “move up a rung” among your peers by buying a new house, car, or social circle

Cost: No cost at all. All you need to do is ask one extra question before increasing your budget: is this extra expense buying a real product, or simply securing a higher status among your peers? The difficulty lies in resisting the urge to upgrade when everyone else does.

In plain terms: When comparing people with similar incomes, those whose neighbors earn more report lower happiness levels. This effect appears only among neighbors with comparable education and frequent social interaction. Thus, spending extra money to move into a neighborhood where everyone is wealthier actually pushes you down the social ladder. Yet when incomes rise across the board, people still feel better off, so absolute levels of happiness remain relevant.

Benefit: The National Survey of Family and Households (NSFH) in the U.S. surveyed the same individuals twice. Researchers matched these results with local average incomes calculated from a 5% sample of the 1990 census. After adjusting for personal characteristics and income, they found that higher neighbor incomes correlate strongly with lower self-reported happiness. This effect holds across multiple analytical methods and remains highly statistically significant. In fact, the drop in happiness caused by a rise in neighbor incomes matches the drop produced by a comparable fall in one’s own income. Even after controlling for individual-level factors or limiting comparisons to the same state and survey round, the pattern persists. This rules out explanations such as happier people naturally moving to poorer areas, unmeasured state-level variables, or differences between renters and homeowners. The effect is strongest among individuals with close neighbor ties, while those who socialize mainly outside their community show no such trend. Happiness declines only when comparing with neighbors of similar education; income differences among less educated neighbors have little impact. The mechanism appears to work mainly through satisfaction with one’s material circumstances rather than other life domains. Finally, when both personal and neighbor incomes rise proportionally, overall happiness still increases.

Evidence grade: B

Sources: Luttmer EFP (2005). Neighbors as Negatives: Relative Earnings and Well-Being. The Quarterly Journal of Economics, 120(3), 963–1002. <https://doi.org/10.1093/qje/120.3.963>; Luttmer EFP (2004). Relative Earnings and Well-Being. NBER Working Paper No. 10667 (The expressions and magnitudes cited in this article are verified verbatim according to this edition). <https://www.nber.org/papers/w10667>

Notes: Several reasons justify a B rating: the data come from repeated surveys of the same participants, this is the sole study of its kind, and the sample is foreign; the measured outcome is self-reported happiness rather than monetary figures. Researchers applied multiple statistical controls, such as within-person comparisons and comparisons limited to the same state and survey round, but the study is still not a randomized trial. No comparable data exist for Chinese populations. The benefit magnitude is classified as “moderate” following the criteria established in section 23 (don’t expect material purchases to boost happiness). The potential savings can indeed reach tens of thousands of yuan; however, because no quantitative link exists between those savings and actual happiness gains, they are not classified as “large.” This advice does not discourage spending on larger homes, quieter neighborhoods, or shorter commutes when those features themselves are valued. What it discourages is spending solely to avoid feeling inferior to colleagues or peers. For guidance on how to prioritize housing choices, see section 4, item 18 (give priority to commute time when selecting a residence). For information on using purchases to improve mood, refer to section 23 (don’t expect material purchases to boost happiness). Regarding the tendency to constantly compare oneself with others online, see section 3, item 20 (don’t make “how others are doing” a daily obsession).