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Beware of the Diderot Effect

One purchase can spiral into many more unplanned expenditures.

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When it comes to saving and building up your net worth, one of the most important things to keep within your means is consumer spending. There’s a direct correlation between your net worth and how much you save, yes, but your consumer debt is also a big factor.

I work with lots of young clients who really start to see traction with their earnings as they enter their thirties. They’ve got some years of experience on their resumes and have made a dent in their student loans. This critical juncture is the point where people generally fall into one of two camps: those who ramp up their savings, and those who let their spending spiral out of control.

Have you ever heard of the Diderot Effect? It’s based on the story of Denis Diderot, a French philosopher who lived mostly in poverty in the 1700s. In a nutshell, once Diderot acquired one new item, he ended up buying more and more newer and nicer things to keep up, even though he had been perfectly happy without them.

In today’s world, we see this effect when people purchase larger homes, for example, followed by new furniture to fit that home, followed by a new rug to match the new couch, followed by all new décor to match the rug. That mortgage which was within your budget has suddenly snowballed into thousands of dollars of excessive spending, and perhaps credit card debt. This hinders how much you can save, and ultimately your net worth and financial stability.

I’m not saying you can’t make any new purchases, large or small. Money is meant to be spent and enjoyed, whether now or in the future. Just make sure to map out all future expenses that may be tied to your initial purchase, and be sure you include them in your plan for paying for that purchase.

If you need help creating a budget and planning for any upcoming purchases, we’d love to help. Just give us a call.

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