James is a good guy. A financial controller with a mid-sized firm. He brings home just over $200,000 a year. And he lives on one of the nicest streets on the North Shore, with most homes having a wide view to the water.

Kate, his wife, doesn’t work. She’s busy enough with their two school-aged children, helping out at the private school some 20km away from their home.

Most fortnights, James’ pay packet is pretty well spent. There’s the mortgage, just under $1 million on their (in a good market) $2.8 million home. School fees. The costs of keeping up a lifestyle that includes ski trips and regular new clothes. And their Korean SUV is starting to look a bit tired compared to the Audis and Mercedes in the garages next door.

In fact, Kate is starting to feel poor compared to her other neighbours. And in comparison to other families at the school.


Kate’s dilemma


She comes home from a book club one night, angry. The other mothers, dressed more expensively, more made-up than her, have been talking about their overseas trips. She won’t be able to afford one this year. And when she introduces a new book — Jodi Picoult — one of the wealthy women denounces it as ‘lowbrow’.

It’s not fair. Her husband works hard. He has degrees in accounting and law. He works for a well-known firm. But they just never seem to have as much money as those around them.

What Kate doesn’t realise is that she’s living in a hazardous bubble.


Lifestyles of the rich and famous


In the street in which she lives, there are a small number of extreme ‘lottery winners’. Many of her neighbours are much wealthier than her. They own businesses. Or are CEOs and surgeons. Some have very high earnings and no mortgage at all.

Even though her husband is in the top 1% of earners in the country, he has not won the lottery of business.

Most businesses will fail within the first 5 years. Only a small proportion will become very successful and go on to make their owners large amounts of money.

Within all the large firms in the country, only a minuscule number of people will gain senior leadership roles, where they’re paid very large amounts of money. And in the professions, only a select few will become surgeons or barristers, earning at the very top.

The particular area in which James and Kate choose to live, attracts those who have survived the near-impossible odds to become wealthy business owners, CEOs of large businesses, or elite professionals in their field.

Some of these people are out of touch with reality. They could do with reading authors like Jodi Picoult, who connect with a much wider range of people.



Survivorship bias


The survivorship bias occurs when we see a group of people who have survived near-impossible odds to reach a unique position — such as having a very high degree of wealth — and assume that they are representative of the norm. They are not. They are unique outliers. Trying to keep up with them can be very hazardous to your wealth and self-esteem.

Select suburbs and streets in large cities can attract these outliers in the largest numbers.

Unfortunately, the characteristics that may help people become top pay-grade ‘survivors’ can be also very unpleasant. Selfishness, materialism and ruthlessness are common. And many of these ‘elite’ areas also have high rates of marital breakdown.


A dose of reality


James, the accountant, is more on top of the numbers. He can see that social comparison with neighbours or school ‘friends’ is doing little good.

And the ski trips — where they often meet them on the mountain — are perilously expensive. When he runs the numbers on skiing, the actual ratio between cost and ‘faff’ — all the organisation, transport, queuing and minutiae of getting a family to the mountain — compared to the enjoyment of what really amounts to just slipping on cold stuff is actually rather slim.

Sometimes, when he notices that they’re just ‘treading water’ financially, he talks about moving south. To the provinces. Where he grew up. Going fishing. And playing the local golf course for $15.

And he is also aware that appearances can be deceiving.

Some of his neighbours have bigger mortgages than he does. Their homes and cars are not their own. It is all a smokescreen. Some will choke and move away. And wealthier survivors will buy their homes and move in.


Changing pond


James and Kate could become more financially free by changing their surroundings. By moving to a smaller town or city, the comparison drag they experience could disappear.

And it may be possible to have a $1 million to invest, rather than borrowing that money to support the liability of an expensive home in an expensive neighbourhood.

Based on some current dividend yields, it could be possible to generate over $50,000 of income each year following Wealth Morning’s Lifetime Wealth portfolio. And grow the capital base at the same time.

There could also be the big gain in having no mortgage. Previous servicing costs of around $60,000 will be no more.

Before James even considers another job, the family may already be $110,000 a year better off. Through investment earnings. And no mortgage cost. And the school and work commutes of two hours each day could fall to 20 minutes.

A high income is great. But a lifestyle based on debt and social comparison is hazardous to your wealth and emotional well-being.

Consider what you really want before it’s too late.


Simon Angelo

Editor, Wealth Morning

(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)