If I asked you if your financial position was “Bad”, “Average”, or “Good” how would you answer? Sometimes it’s hard to determine exactly how you’re doing. Does having enough money to pay your bills each month qualify as “good”? Does carrying a credit card balance qualify as “bad”? I don’t know that there is any one correct answer to this.
To a large extent, how we feel about our financial position depends on the financial position of those around us. For example, we live in a predominantly working-class neighborhood in the city. Most of the homes are relatively small and inexpensive. Most of the people have a high-school education, there are a large number of renters, and you can just tell that a lot of people are struggling to get ahead. Looking from this perspective, our financial position is definitely “good”.
However, there are many other references points that I could use such as co-workers, family members, and friends. I could use some of these reference points and consider our financial position to be “good”, I could use others and consider our financial position to be “average”, and there are other reference points I could use and consider our financial position to be “bad”.
The point is that there are multiple ways of looking at the same set of facts. There are days where I feel like we aren’t doing so well, because I’m comparing us against a certain reference group. On the flip side there are days I feel like we’re doing very well, because I’m comparing us against a different reference group. But, to get a truly accurate picture of our financial situation I shouldn’t be using any reference group at all. Instead, I should just look at the numbers. Are we spending less than we earn? Is our net worth going up? Is our debt level going down? As long as we can answer “Yes” to all of those questions, it doesn’t really matter how we compare to anyone else.