When was the last time you judged your friends for their poor spending choices?

Yet each time we judge others’ spending, we’re less likely to actually look at our own spending and do something about it. And just as your friends probably overspend on “ridiculous” things, so do you.

Today, I’ll illustrate several examples of how hypocritical we are in judging others’ spending. So come along — but hold on, because we’re going to be looking in the mirror for much of the ride.

“I can’t believe she spent THAT MUCH on her wedding…”

Which is fine! Unlike other boring personal-finance pundits, who delusionally lecture you to have a small wedding (when you won’t), I’m a big fan of spending extravagantly on the things you love, if you cut costs mercilessly on the things you don’t. (Hint: If you’re 20 years old, you need to be saving $333/month for your wedding. 25 years old? $1,167/month.)

And yet, there are always people who will judge you for your spending choices.

Introducing the most annoying people on the planet

On the wedding post, there was a group of commenters that were some of the most annoying people I’ve ever heard from:

“$28,000 for a wedding is absurd. Most weddings end in divorce, why start your marriage financially cramped by a wedding? Yes, I realize you can plan to save that $28,000 in advance. However, wouldn’t it be more sensible to use that money for a down payment on a home (instant equity!). Or, to buy outright a late model used car? Just a few thoughts.”

“28k for a wedding is utterly ridiculous The key is to NOT invite everyone you know. I spent about $2500 TOTAL on my wedding 4 years ago. Yes, you read that right…What a complete waste of money to spend 28k on one day! What about saving that money for the rest of your life?”

“Wow, I don’t know where morons that spend $28K on weddings buy the stuff to do it, but I’ve got some left over paper plates I can sell you for $100 each.”

You can find these annoying people criticizing others’ spending on virtually every post on weddings.

Each of these people made it their mission to point out how “ridiculous” it is to spend $28,000, or $10,000, or even $2,000 for a wedding. ‘It’s outrageous! I did it for $100! Stop wasting your money,’ they angrily write.

But there’s just one thing…

They’re all hypocrites.

What would they say if I examined their spending? In fact, here’s a new rule:

Give me your budget and 10 minutes on the phone and I could identify 20% of your money being “wasted” on something useless and unnecessary.

Now, an exploration on how hypocritical we all are about money.

We’re hypocrites for judging our friends’ spending

When you judge others for their spending, you automatically assign YOUR values to them without even recognizing it. You think spending money on clothes, or first-class airfare, or expensive jewelry is wasteful? What about your own spending?

“That is just stupid. Unless the clothes are broken, there is no need to return it. If it is the wrong size, it can be exchanged for the right size.

PS: I hate the mentality of people buying clothes for “fashion” or whatever. You are buying $100 for something that costs $10 dollars to manufacture in China!

And about fashion trends – it is wasteful and stupid. If last season/year’s clothes are not broken, there is no need to buy new ones. Jeezz. As for “brand name” clothes – wake the fuck up.”

Yes, I’m sure your computers and new XBOX and 30″ LED TV are so important, too.

You think it’s ridiculous to buy $100 clothes? Let’s go beyond the knee-jerk reaction to understand what’s actually going on here.

• What if your friend who buys expensive clothes makes twice as much as you (say, $120,000)? Is it “wasteful and stupid” then?
• What if your friends don’t eat out as often as you, but they love buying a new shirt every month because it makes them feel good?
• What if you live in the midwest, but your friend lives in Manhattan? How does that change things?
• What if you’re 25 and your friend is 29? How does that change things?

Judging others’ spending is emotional, not rational

Think back to the last time you judged someone else for spending. Maybe you heard how much your friend pays for his apartment, or overheard your co-worker talking about yet another weekend vacation.

When we judge others’ spending, we do it emotionally, not rationally. Let’s say you hear that your friend is going on a trip to Vegas and staying in the Bellagio for $800/night. Do you consciously evaluate his income, age, spending patterns, priorities, and debt levels? Of course not. We simply say, “Wow, I couldn’t imagine spending $800/night on a hotel room. Therefore, his spending is RIDICULOUS!”

When it comes to judging spending, we consistently demonize others’ spending while rationalizing our own.

Ironically, if you went back in time and asked yourself of 5 years ago if he could imagine spending what you spend on food/clothes/travel today, the younger you would scoff and think your modern-day spending would be “ridiculous,” too. What do you think you’ll be doing 5 years from now?

But if someone dared point out your own spending on something — say, a new Macbook because your old one was “slow” — you’d have a multitude of reasons to justify it. “My old one was slow…and this one is important for my productivity…and I need it to run the new software I want, and….”

This pattern repeats itself in virtually every article on others spending money online:

In a terrific New York Times article on redecorating on a budget, a newlywed couple budgets $2,000 to renovate their apartment.

“$2000 is more than I’ve had to spend on decorating my entire house for the past four years. Decorating on a budget? How about $500 or less…”

“I made handsome, one-of-a-kind pillows, by taking embroidered dresses my brother purchased in the Middle East, that our mother never wore, and made covers for pillows I had tired of. (I didn’t even have to buy blank stuffers). ANY fabric store has even high-end design-house remnants that would be suitable and CHEAP.”

“How many newlyweds can afford to spend this kind of money on revamping their apartment?…I would rather put that money in a savings account for a house, or put it away for a nice vacation.”

Notice the presumptuous commenters condemning the couple for spending on their home decorations, and suggesting that their way — making pillows by hand or putting the money away for a vacation — is “better.”

Again, give me these comments’ budgets and 10 minutes on the phone, and I could identify hundreds of dollars per month that they’re “wasting” — according to my tastes. Yet few people — even those who lob financial judgments at others — would ever subject themselves to scrutiny of the same kind.

What is going on here? Are these people simply angry or jealous at hearing about other people spending on items they consider luxuries? Or is there something more going on?

In few other areas of our lives are we so adamant about us being “right” and others being “wrong,” particularly since most of us are terrible at managing our own money. When you dig deeper, you’ll discover the fascinating psychology of self-serving biases and other psychological mechanisms we use to judge others — but protect ourselves.

The psychology of judging others

The first phenomenon in judging others is called a “self-serving bias,” which we use to protect ourselves from judgment:

A self-serving bias occurs when people attribute their successes to internal or personal factors but attribute their failures to situational factors beyond their control…For example, a student who gets a good grade on an exam might say, “I got an A because I am intelligent and I studied hard!” whereas a student who does poorly on an exam might say, “The teacher gave me an F because he does not like me!”

If your friend buys a $500 coat, you might say, “That’s nuts…Jack is really bad at managing his money. He can’t even control his spending!” But when I asked you about the $500 coat in your jacket, you might say, “Oh, that’s because I had to go to a wedding last month.”

Second, we employ the Fundamental Attribution Error to judge others:

In social psychology, the fundamental attribution error…describes the tendency to over-value dispositional or personality-based explanations for the observed behaviors of others while under-valuing situational explanations for those behaviors.

In other words, “She bought those Jimmy Choos because she’s financially irresponsible” instead of “She bought those Jimmy Choos because she recently earned more money or negotiated her salary.” When judging others, we believe people make decisions because of WHO they are, rather than the SITUATION they’re in.

Third, we use the powerful strategy of downward social comparison:

Downward social comparison is a defensive tendency to evaluate oneself with a comparison group whose troubles are more serious than one’s own. This tends to occur when threatened people look to others who are less fortunate than themselves…For example, a breast cancer patient may have had a lumpectomy, but sees herself as better off than another patient who lost her breast

Wondering where you’ve seen this? Turn on any talk show or radio show. Try to monitor your emotions during the episode. You might notice your internal voice saying something like, “Oh yeah, I have $5,000 in credit card debt…but at least I don’t have $45,000 debt like that guy. This actually feels good — one of the chief reasons that talk shows and Money Diaries do so well. Yet the feeling of satisfaction is short-lived.

Fourth, we have the Shrug Effect:

We see a famous CEO and point how “he took 5 companies public and got a Harvard MBA.” We see a successful children’s book author and point out how she already knew 4 publishers, so her book got published immediately. We point to Donald Trump and talk about how he had billions, so of course he could buy half of Manhattan, and we note that we’re already older than Michael Dell was when he was running Dell out of his dorm room.

And then we shrug. “What can we do?” “She has a Harvard MBA.” “They made it big, but they’re different than me.”

You see someone spending a lot of money on something that you consider “crazy.” Instead of trying to figure it out, we often shrug and say, “Well, they have [SOME ADVANTAGE YOU DON'T HAVE] and that’s how they do it. There’s no way I could ever do that.” Since this is psychologically painful and difficult, we demonize their behavior. Easier than understanding it.

A prime example: Demonizing a CEO for her spending experiment

Let’s examine a recent example of this.

Alexa Von Tobel, the CEO of a personal-finance site called Learnvest, wrote an article called, “How I Went 24 Hours Without Spending Any Money…In New York City.” (Interestingly, the article is now gone, and so is the Google cache. You’ll see why in a second. Fortunately, I grabbed a screenshot before it was taken down. )

Now, it may not have been the most tactful article, especially in this economic climate. In fact, the tone was somewhat condescending. But I intentionally chose this extreme example to make a point.

The problem is that Americans hate people who write about how they spend money on anything that’s not directly focused on the bare necessities of living.

The one wedding day of your life? You’re spending too much. Taking a luxurious vacation that you saved up for? You could feed 2,000 foreign children. Buying a couch for your living room? You should invest that in your Roth IRA.

How do you think people responded to Alexa’s article? Did they make thoughtful comments on the economy or different ways to earn money? Of course not. Commenters from around the web were absolutely livid.

On Shrug Effect.

A better way to approach the question would be to acknowledge that she probably has a few advantages you don’t, but focus on the things she DOES control — which you can learn from. For example, you could stipulate that yes, she likely has some advantages in life (maybe wealthy parents, some inheritance money, whatever)…but focus on the things you can control. She started her own company. She made friends with XYZ. She got internships at XYZ, which led her to XYZ2.

If you want to live her lifestyle, it pays to ask: How could she be earning SO MUCH that she could afford to take cabs every day? What is she doing that I don’t know about? Who can I talk to to learn more? How can I earn more money?

To many people, this is too much work. It’s easier to throw your hands up, accuse her of being a rich trust-fund kid, and then feel better about yourself since you don’t waste money on cabs every day. Witness virtually every comment accusing the writer of being wasteful and spending outlandish amounts of money on food and other supposedly wasteful items.

It’s much harder to actually consider the details of the situation. For example, one Reddit commenter notes that, “Often very highly paid workers have very little free time so it makes sense to spend some money to buy back some time, such as getting in a cab to get somewhere quicker.” Instead of criticizing her spending, wouldn’t it be more productive to ask, “Damn, this woman obviously makes a lot more money than I do. How did she do it and what can I apply to my situation?”

We’re more than happy to criticize others’ spending. Yet few people ever try to ask themselves what they can learn from someone whose spending outpaces their own — and even fewer open up their own finances to such scrutiny.

A huge caveat: Most people are terrible with their money

There is one upside to judging others’ spending: Since most people are absolutely terrible at managing their own money, when you judge them, you’re probably right.

An excerpt from my personal finance book:

Yet it’s gone from being annoying to fascinating: You can get true insights into people’s belief systems about money by watching what they say.

1. When I launched my Earn1k course to help people earn more money, I got many comments about how crazy others would be to spend money on my course — and how dare I charge for an online course.
2. A while back, Henry Blodget wrote a a semi-satirical article on the Huffington Post called “Easiest Job on Planet: Bank CEO. And in a separate thread, internet commenters took the bait, writing that being a bank CEO is all about luck and secret connections. This is classic Shrug Effect from armchair businesspeople who have never run a company. Even more interestingly, the comments reveal several limiting beliefs about money, such as “money=evil” and “anyone who has money must have done something bad to get it.”
3. Another personal finance blogger, FMF, wrote a guest post about making 6 figures in 7 years. The result? People hated him. Themes include jealousy, “not everyone can do it,” excuses like “I’m too old,” and “Yeah, but $100k means you hate your job.” Funny, few people say, “Wow, this guy did a lot of hard work to earn six figures and now he’s writing a free blog post to share how he did it. What can I take away from this to improve my life?” Easier to criticize others’ spending — or earning — rather than do something different in our own lives.
4. Erica Douglass, who sold her company for over $1 million at age 26, writes about outsourcing part of her life. The commenters go nuts, accusing her of being irresponsible with her money, racist, and virtually every other financial criciticism you can imagine.

What can you learn from judging other people’s spending?

First, when you judge other people for poor spending, you’re probably right, since most people are horrible at managing your money. This judgment is profoundly rewarding — and also wasteful — since we employ psychological techniques to distort our judgments in favor of our own spending. Think back to the last time you gossiped about a friend’s new pair of shoes or iPhone: It felt good for a few minutes. But it didn’t produce any positive behavioral change for you to change your spending.

Second, it’s easy to judge others, but hard to honestly evaluate our own spending. When we judge others, we assign “dispositional” reasons like, “He is just really bad at managing his money.” But when it comes to ourselves, we use “situational” explanations like, “It’s my birthday…I deserve it!”

Third, you WILL go up the hedonic treadmill and increase your spending as you earn more money — it’s only natural. When we judge someone else, we rarely take their income, savings, and other largely invisible factors into account.

Fourth, in America, we have a special hatred of people who earn significant amounts of money — especially when they fall from grace. If someone earns $250,000/year and spends $10,000/year on clothes, is it really “ridiculous”? In the above examples, you saw numerous examples of people earning six figures, spending on things that were very much in their reach — but people criticize without context.

Fifth, judging others is toxic. It’s not enough for us to make money — as a University of Texas researcher writes Psychology Today, “What makes me happy is that I make more money than you. It isn’t enough just to make a lot of money, you need to make more than the people to whom you compare yourself.”

But judging others goes even deeper. Have you ever noticed that co-worker who always complains about his boss, job, salary, etc? Think back to the last time you sat next to him — did you start complaining, too? Soon afterward, you feel worse about yourself. This negative emotion is the same thing that happens when you listen to a radio host skilled at evoking your emotions. You get outraged, you get angry….and the short-term emotion retards long-term behavioral change — it literally robs you of energy.

Judging others’ spending is a natural phenomenon. It’s also destructive and wastes time focusing on others, when you could focus on yourself.

About to judge someone’s spending? First, use this 5-step process

Whenever you find yourself about to judge someone else’s spending, ask these simple 5 questions first.

1. How much do they earn?
2. How much do they save, on a percentage and absolute basis?
3. What do they consciously spend on and what do they NOT care about spending on?
4. How long will they be keeping this purchase? (For example, are they buying a car to keep it for 10+ years? Or are they buying shoes to keep for one season?)
5. MOST IMPORTANT: Are my own finances automated and optimized? If not, automate your personal finances and implement the STFUDF Technique — against yourself.

Since few people will do this, my hope is that you’ll distract yourself enough to stop the insidious process of judging someone else before looking at yourself.

Personally, I’ve been trying to get better at this recently. To do so, I have to remind myself that personal finance is personal. You don’t know your friends’ financial situations — although they are likely not very good. But each time we judge someone else, we make it less likely of taking action on our own finances.

Earn more money: My Earn1k course to help you earn your first $1,000 on the side.

Isn’t it interesting how hypocritical we are about money?

We say things like…

• “That’s ridiculous. Who needs a $200 dinner? That would feed me for 3 months.”
• “She bought $400 shoes? What a waste of money.”
• $21,000/year going out? There are starving children in Africa.”

Yet when it comes to our new iPad or computer or trip, it’s different.

We look at others’ spending and deride it as frivolous and unnecessary, yet we use cognitive dissonance and other mechanisms to justify our own spending. And we’d never expose our spending to the light of outside scrutiny.

I’m working on a monster post about how hypocritical we are with money — and especially how we believe that “money=evil” in America. If you have any stories to share, let me know in the comments below. Have you judged others for their spending? Been judged? What do you think of someone paying $1,000/night on a hotel room or $500 on a pair of jeans? What about an iPad?

Stay tuned for the larger post.

[Update] The largest post is up here: Attention annoying hypocrites: Stop being judgmental about your friends’ money habits

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Odds and ends…

If you’re interested in the single-best book on how we’re cognitively wired to blame others but not ourselves, read Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts by social psychologist Eliot Aronson (whose class was one of the best I took at Stanford). It is absolutely chock-full of psychological insights and will give you tools to analyze/understand friends and co-workers in virtually every social situation.

Also, you might notice some minor design changes that rolled out on iwillteachyoutoberich.com last night. We’re doing ongoing testing.

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Why has “Raj,” an immigrant who’s lived in the USA for 10 years, saved $150,000 in cash, while few of us born here would ever be able to do the same?

I’m fascinated with the differences in how people around the world spend and save money. Having grown up around a lot of immigrants, I can tell you that their spending patterns are wildly different than people who were born and raised in America.

I was reminded of this a few days ago, when I got this email from an immigrant — let’s call him “Raj” — who’s been in the USA for 10 years.

“I live here in Fremont now and I have about $150K with me in my bank, most of it stored away like that for more than 1 year now because I needed it to buy a house. Now I have stopped thinking hard about the house, since I still dont know where I will settle down, especially after reading your book to avoid buying a house as an investment. I have started diverting most of the money to LifeCycle funds and I also opened an IRA.

In my case , as a Immigrant I still send a lot of money to India where somehow I have good contacts and usually earn much much more than 8% on my money. That is a strong reason I never bothered to learn about investing here. But now I am diversifying and investing both in the US and in India.”

This is extremely common, especially in the Bay Area: You get a single, highly skilled guy who moves from India to a well-paying job in the US. He works his ass off, lives in a small apartment, and sends some of his income back to his family in India. In a few years, he’s saved well into the 6 figures, at which point he either (1) goes back to India to find a bride and returns to continue working, or, less commonly, (2) moves back to India with a nice bit of cash.

This got me thinking. Why do immigrants save so much?

A few easy reasons come to mind:

• They’re more educated (see the Wikipedia entry on Indian Americans)
• They earn more (another Wikipedia link)
• Their culture encourages higher savings rates (see this Atlantic Monthly article). Culture is also why some immigrants are stereotyped as being poor tippers…which is often very true.

I’m especially interested in the cultural factors that affect financial habits. Here’s a fascinating one I didn’t know about from University of Michigan Retirement Research Center (PDF link).

Data from the EBRI Retirement Confidence Survey indicate that Hispanic-Americans who immigrate to the U.S. exhibit different savings behavior than other Americans.

They tend to save more for short-term goals such as education or a home purchase rather than retirement, and are extremely risk averse, placing greater importance on safety than rate of return on investments, relative to others (Kamasaki and Arce, 2000). In addition, they are more than twice as likely as natives to have provided financial assistance to family members (both in and out of the U.S.) and they are more likely to expect their retirement years to be financed by income of other family members (Kamasaki and Arce, 2000)…for many households these intergenerational transfers may be a major component of retirement saving and planning.

If you can’t understand those words, please go find an immigrant and ask him to translate for you.

I’m sure there are several other reasons that are far more complex. We’ve read the New York Times article on how obesity can be contagious, and I’ve long since argued that personal-finance behaviors are contagious, too — suggesting that maybe you should spend time around immigrants so their financial habits rub off.

In your experience, how do spending patterns differ between immigrants and (native) Americans?

Personally, I remember growing up and taking roadtrips to LA. With six of us, lunch at even a fast-food place would be expensive, so my mom packed lunch and we’d stop somewhere to eat it. We never had a summer home — the whole concept was foreign to us. We never had the most fashionable clothes, but my parents would spend a LOT of money on activities for my siblings and me, and didn’t bat an eye at an SAT prep course that cost thousands of dollars.

Like I said, immigrants have incredibly different spending patterns than most of us. What’s your best example of the difference in financial behavior between immigrants and (native) Americans?

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Lots of people talk about spending on things you value. But what about the things we don’t care about?

This baby knows something most people don’t: What he doesn’t like

When I wrote An Ode to Jim Blomo, I talked about my friend who’s honed his conscious spending and spends thousands on the things he loves:

Jim has told me over and over that he doesn’t care much about living in a fancy place, so he saves money on that. He cooks at home when he can instead of eating out every day. But he loves outdoor stuff–biking, camping, travel. And so he splurges on those things. He has a top-of-the-line bike. He just got back from a week-long trip to New York, just for fun.

Jim also cuts costs mercilessly on his housing, choosing to live in a place far smaller than he can afford. To him, it’s not important, and he’d rather spend his money elsewhere.

This decision — of what’s important as well as not important — is at the heart of the Conscious Spending Plan I describe in chapter 4 of my personal finance book.

Previously, I’ve written about friends who spend $21,000/year going out and $5,000 on shoes.

But we haven’t focused on what you choose not to spend on.

When I asked friends this, they were quick to answer what they valued — “organic food” or “travel” or “nice clothes” — but almost uniformly found it difficult to answer what they didn’t value. When I asked one friend, “What do you not care about? What would you be willing to buy a lower quality of (or not at all)?” he looked at me blankly. I considered violence.

It’s critically important to be explicit about what you don’t value as much as what you do. By writing it down — on a blog or a notepad or an Excel doc — you can prioritize your purchases and avoid being sucked into spending on things you really don’t care about. As Jeff Solomon writes:

“When I come to work tomorrow I’ve got to figure out what NOT to do first and focus on the single most important item first. No matter how hard it is, I’ve just got to get through it. It’s just too easy to get sucked into the unimportant. There are too many things on my lists that just don’t move the needle or don’t make a difference. At work and at home, some things have more impact than others. And when the lists get long, I’ve got to know what NOT to do before I can figure out what to do.”

What do you not care about spending money on? I’ll start. When it comes to spending, I don’t care about…

• A fancy sports car. I’d rather have a Honda Accord and drive it for 10+ years (more on how I bought a car)
• The type of cheese I eat — Kraft singles are just fine
• Shampoo, etc. They’re all the same to me
• Super-fancy restaurants. I’d rather eat out a lot with friends at a bowling alley than eat at the fanciest places. (Note: This specifically fits into my Conscious Spending Plan by letting me see more people at less-expensive restaurants. If I cared about expensive restaurants, I would eat fewer meals at higher-end places.)

As part of your conscious spending plan, what do you NOT care about spending money on?

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Jason writes:

I’m 30.

Just divorced. Not fun.

$30k in debt. Freaking me out.

I have an old 401k that I rolled over from a previous company into Sharebuilder. Value $8,500.

I’m very inclined to withdraw the cash with penalty and pay off a higher interest credit card (13%). I know that mentally and emotionally it will make me feel better to give a big “peace out” to a credit card that I cut up a while ago.

I’m torn and looking for advice. There’s no way I’m making 13% on the money within Sharebuilder.

My financial goals: pay off all debt as soon as possible, and live a simple, cash lifestyle with lots of savings / investment. Looking at all options: cutting back on $tupid crap, selling stuff, and maybe even freelancing to make more money (even though I make $80k+ at my full-time job). If you’re wondering, I have a Simple IRA that I contribute to every month with my current employer.

Any help is appreciated…

Before you answer…

• Remember, there’s often a difference between the best decision and the financially correct decision.

• You can also get huge advantages by pre-paying your debt.

What would you tell Jason? (And watch the comments to see how they differ from your own opinion…that’s the most interesting part.)

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Maybe it’s the holidays, but today instead of ranting and screaming at someone on this site, I decided to dig up one of my favorite posts:

What are we doing on this site?

Yes, I read my own posts sometimes.

Anyway, for those of you who haven’t been around since the early days, I wrote that on the day I graduated college in 2005. Check it out.

And happy holidays.