Good morning everyone, and happy Monday! Today I’m going to talk with you a little bit about how buying something new can snowball into a whole unexpected ball of financial disaster.
Have you ever bought something new and found it made everything else in your home, or life, look just a little bit shabbier? It’s the scourge of remodeling, isn’t it- you get new counters and suddenly notice that your microwave is old and needs replacing. Your shiny new microwave makes your old fridge and dishwasher look…shabby.
Once you have that new fridge and dishwasher, you realize you need to paint the walls and geez you never noticed just how scuffed up the floor is! Before you know it, your one purchase has led to a cascade of purchases, one after another. Each new purchase makes you realize just how much you need to make that next one. If you’re not careful, this can lead to financial disaster.
This Isn’t New
Is this a new phenomenon, driven by our consumerist culture? You might be surprised to know that this was written about hundreds of years ago – in 1769, specifically, by Denis Diderot, a French writer. He once got a gift of a scarlet red dressing gown (aka pajamas) that ruined his life. You can read the entire thing here – Regrets for my old dressing gown.
Essentially, Diderot used to have a wonderful, cozy, but slightly shabby old dressing gown. It went with everything in his house – his cozy chair, the painting on his wall, his housekeeper, everything. And he was content with his life.
Then he got a gift of a beautiful, bright red dressing gown. At first he was happy – after all, who doesn’t like a brand new, gorgeous dressing gown? But something unexpected happened. Given its newness and brilliance, he suddenly noticed just how shabby everything else in his life looked. He felt he had to make his environment match his gown, so picked up a new mirror. Then it was a new leather chair. The old painting looked shabby next to these, so of course he needed new paintings. Then it was a new clock, and so on and so on.
Essentially he went deep into debt to make his environment match his new pajamas. Now “The Diderot Effect” is used to refer to the concept of spiraling consumption and purchasing complementary items to reflect your identity.
The Diderot Effect In The Millionaire Next Door
I remember reading about this same process, although not referred to by name, in The Millionaire Next Door (one of my favorite books of all time). The author, Dr. Thomas Stanley, talks a lot about how real millionaires don’t want to have the trappings of wealth. There was one millionaire 65-year-old whose friends wanted to get him a Rolls Royce for his birthday. He found out and put a stop to it.
Why? There was nothing about having a fancy car that he wanted. He enjoyed fishing and wanted an old car where he could toss his fishing stuff in the backseat. Here’s the part that struck me from the book:
“He said, ‘It’s totally incompatible with my lifestyle.’ What he was saying was: If you have the car, you’ve got to change the house. You change the house … you’ve got to have a rug that’s compatible with it, you’ve got to have the furniture.”
If you’re interested in learning more about the book, which is one of my all-time favorites (I’ve probably re-read it a dozen times), you can read this synopsis from 1996 when the book first came out. Then you can swing by Amazon and pick it up, or take it out from the library.
How the Diderot Effect is Connected to Stealth Wealth
I remember reading about stealth wealth over at Joshua Kennons site years ago, and it also reminded me of the lessons of The Millionaire Next Door. The trappings that we might usually associate with wealth that we see in the media – the fancy car, expensive clothes, huge house, latest and greatest whatever – are not what the actual wealthy buy. Something like 80% of the new elite (top 1%) hide their wealth from friends, and family. They live in ordinary houses and drive ordinary cars. They are truly the millionaires next door. And why is that?
The fancy stuff in life doesn’t represent what these people want. They know that if they start buying the “fancy stuff”, more purchases will follow. Buying the big house in the wealthy neighborhood leads to the need for private school (like everyone else), expensive cars (to look good in the driveway), pricey clothes, country club memberships, and so on. One purchase can lead to a snowballing of consumption – so these folks don’t let that snowball start in the first place.
Many of them became rich by saving slowly over time, spending less than they made, and investing wisely in their business/stocks/real estate. They want their wealth to make a difference, and they spend money on the things that really matter to them – not a high-consumption lifestyle. And that’s a lesson we can all use, no matter what level of wealth we currently have.
So if you see a shiny red dressing gown or the latest I-whatever, stop and think about the purchase before you go ahead and make it. Is this something that will get you closer to your goals, or help you in your life? Or might it lead to the Diderot effect?
I Want To Hear From You!
Have you experienced The Diderot Effect before, or seen it happen to friends and family? Or are you a proponent of “stealth wealth” where you keep your financial cards close to the vest and don’t let consumption get out of control? Let me know in the comments.
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