Keeping Up With the Joneses’ Tax

“Keeping up with the Joneses” – (idiom) to show that one is as good as other people by getting what they have and doing what they do. Merriam-Webster dictionary

I can relate to this. In my high school years I was so focused on what other people thought of me. I remember spending my first W2 paycheck and on the latest Nike basketball shoes – probably worked 3 weeks for those shoes.

I spent very hard-earned money ($4.75/hr. pushing grocery carts) on clothes. Interesting, because today my family would tell you I place little value on clothing and really dislike shopping for clothes.

Or how about the time I spent $2000 on an auto body kit for my $6000 1994 Ford Probe. What a cool young fool I was back then… ha.

All this to fit in and impress girls.

We grow up and out of these silly ways right? Sometimes we don’t and the consequences are far greater as adults. We can destroy our financial situation by pursuing a lifestyle beyond our means. Occupying our valuable mental capacity wondering what others think of us while they do the same. How ironic?

A deeper dive on the Keeping Up with the Joneses’ tax in a few foundational expense areas:

Shelter – The average US home price is at the highest point it’s been since tracking the data (includes inflation adjustment):

Lower interest rates have helped keep more expensive homes affordable:

But, the Joneses’ tax is not affected by lower interest rates.

This article does not set a price or monthly payment target for housing. Many other resources cover that topic. It highlights all the other sneaky costs involved with owning more expensive homes – Joneses’ tax.

Expensive, larger homes require more landscaping. You can’t live in a 500k home and have a barren wasteland out front (even if your HOA would allow it, you wouldn’t want that on such a valuable home). Landscaping is expensive to install and maintain.

HOAs – homes like this are built in nice neighborhoods with nice amenities and high HOA fees. They’ve exploded in growth over the last 5 decades (from 2.1 million HOA residents in 1970 to 73.9 million residents in 2019), with average monthly costs of $250. https://ipropertymanagement.com/research/hoa-statistics#facts

Furnishings – American median home size has increased 50% from 1980 to today:

We have more space to fill with furnishings and fewer people living in those homes. The average household size declined from 2.76 in 1980 to 2.53 in 2020): https://www.statista.com/statistics/183648/average-size-of-households-in-the-us/

Transportation –

You need some wheels right? For a car I consider to be an amazing ride (I’d enjoy driving a used one someday) – the Lexus LS. The monthly cost staggers on a current year model:

Depending on your circumstances, you may not finance it all or maybe the payment fits well within your transportation budget? However, you are more likely to spend on an expensive vehicle if you find yourself surrounded by others with similar ones – it’s just human nature – Joneses’ tax.

Insurance and Maintenance costs are higher. More expensive vehicles = higher labor and parts costs for repairs. I guess they figure you can cover it.

Gas – Premium gas is typically 25% higher than basic unleaded. Just a 25% headwind on your personal finances rain or shine – Joneses’ tax.

A core philosophy of the FI movement is the 4% rule – estimates your needed nest egg for retirement. Under it you can safely spend 4% of your invested assets per year in retirement and not run out. Therefore, you can multiply any annual expense by 25 to calculate the needed lump sum to fund that ongoing expense. If the Joneses’ tax hits you hard and your Shelter and Transportation costs are $1500/mo. higher, you will need an additional 450k at retirement to afford that lifestyle ($1500 * 12 months * 25 = $450,000). With these choices you are forced into saving more, working longer or a combination. Your choice. 

We all have choices to make about what we value. Make yours with eyes wide open. And don’t get trapped by the Joneses’ tax.