199 – The Diderot Effect: How to Get Out of a Spending Spiral

What causes us to spend beyond our means? While in some cases it's the result of a job loss or illness, in other situations, it's the Diderot Effect at play. The Diderot Effect is a social phenomenon where the introduction of a new possession that deviates from what you currently own leads to a spiral of even more consumption. For example, when you buy a new house, you don't just settle for the home. You now have to have new furniture, maybe a new deck, and so on. This creates a cycle of spending and leads to debt.

How do we, then, prevent ourselves from becoming a victim of this effect? How do we control a spending spiral? My guest today suggests thinking critically about what we see on social media and on television is a great place to start.

Robert Gignac works on behalf of advisors and financial professionals to help their clients better understand money management. He's also the author of Rich is a State of Mind: Building Wealth and Happiness: A Blueprint. In his experience, ordinary people become victim of the Diderot Effect because of the deceptive nature of social and digital media:

The real world does not exist on Facebook or on Instagram. What that is, is everybody's pictures of their best day all the time. And none of those social networks really show us what's happening in those people's lives when it's not on their best day, when they're lying awake at 3 in the morning because the Visa bill's due and the Visa bill's $1,700 more than they've got allowable to pay it on that given day.

He believes that in our attempt to keep up in large part due to our fear of missing out, we go beyond our financial means. In addition, once we've set a new and higher standard of living for ourselves, it's very hard to go back down.