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Do You Suffer Symptoms of the Diderot Effect?

Do You Suffer from Symptoms of the Diderot Effect?

Wait…what effect?

Is this a severe illness?

No, you are not sick.  You are just fine!  Let’s go back in time for a bit of a history lesson.

Brief History Lesson

There was a French philosopher named Denis Diderot who lived nearly his entire life in poverty. His daughter was to be married, and he could not afford to pay for the wedding. However, that changed one day in 1765. Even though he did not have wealth, Diderot was well known for his role as the co-founder and writer of Encyclopédie, one of the most comprehensive encyclopedias of the time.

When Catherine the Great, the Empress of Russia, heard of Diderot’s financial troubles, she felt sorry for him.   As an avid book lover, she immensely enjoyed his encyclopedia.  She offered to buy Diderot’s library for £1,000, which is more than $150,000 today.  Suddenly, Diderot was a wealthy man. Not only did he pay for his daughter’s wedding, but he also acquired a scarlet robe for himself.

Diderot’s scarlet robe was extravagant. It was breathtaking; he immediately noticed how out of place it seemed when surrounded by his more common possessions.  Diderot soon felt the urge to upgrade his possessions. He replaced his rug with one from Damascus.  Diderot decorated his home with expensive sculptures.  He bought a mirror above the mantel and a better kitchen table.  He tossed aside his old straw chair for a leather one. Like falling dominoes, one purchase led to the next.

The Diderot Effect

Diderot’s behavior is not uncommon.  The tendency for one purchase to lead to another has a name: the Diderot Effect. The Diderot Effect states that obtaining a new possession often creates a spiral of consumption that leads to additional purchases.  This pattern exists throughout society today as it did then.  For example, when a person buys a dress, they feel the need to buy new shoes and earrings to match.  Or, when an individual buys a couch and suddenly questions the layout of the entire living room.  Lastly, the purchase of a toy for a child and soon after purchasing all the accessories to go with it are in the shopping cart.

In modern society, the effect usually happens when a person graduates from college, graduate school, medical school, residency, and starts their full-time career.  The student has been studying for so long and is ready to make money.  Next, they see how much money they will earn and realize everything they could not afford in school but now want.  Some of these items include:

New Car
New Home
New Furniture
New Clothing
New Electronics

There is nothing inherently wrong with purchasing the above items.  However, when purchased in excess, it can cause people to stray towards a dangerous path of spending.  It can lead to credit card debt.  Credit card debt is the worst kind because the interest rates are almost always in the double digits.  Also, it can lead to lifestyle inflation, where bonuses and pay raise equate to a person spending the extra money.

In 2015, Nobel laureate Angus Deaton concluded that the correlation between emotional wellbeing and income tops out once a person earns $75,000.  In other words, any dollar above that amount won’t make an individual any happier. 

Whether this is true depends on the guardrails a person has in life to stay away from expensive things beyond their means.

The Cure

You can do things to help cure yourself of the Diderot Effect.
  1. Establish a Budget:  I know “budget” sounds like a four-letter word.  Most people hate the process because it is labor-intensive finding all the numbers. The reality of visualizing the profit or (loss) number on a monthly or annual basis is something you might not want to see.  The process is like stepping on the weight scale.  No one likes to do it.  But it gives you valuable information.
 Pro Tip:  Spend less than you make! 
  1. Savings on Autopilot: Have your HR department send a % to a savings account when you get paid.  As this grows, it will become your emergency fund.  Having 3-6 months of excess liquid cash will allow you to self insure from job loss, major medical expenses, car accidents, and home repairs.  Paying yourself first allows you to save and move money to where you know it needs to go without the temptation of it in your checking account.
Pro Tip:  Push your savings priority to the front of your cash flows, then spend what’s left! 
  1. Pay more to Debt: Whether it is credit card debt, auto loans, college loans, or a home mortgage, paying debt off faster by using excess savings will remove the ability to purchase more things.   Also, it will save you money in interest in the long run.
Pro Tip:  Pay debt off quicker and give yourself a pay raise in the future!
  1. Increase Investing:  After you have funded the emergency fund and are paying off high-interest debt, start increasing your investments.  Contribute more to your 401(k) or retirement program.  Open a Roth IRA and fund it (if you meet the income requirements).  You can open and start sending your money to many other investment accounts such as a health savings account, Traditional IRA, College Savings Account, or a plain taxable brokerage account.

Pro Tip:  Push savings to investments at the beginning of the month to prioritize retirement.

An Enjoyable Life

The goal of this article is not to starve yourself.  Or, do not buy expensive things.  However, everyone needs a budget!!!  The tracking of expenses is a priority no matter what your income is.  Even high salaried physicians need a budget to understand where their hard-earned money goes.  Then, they can decide if those things are what they want to be spending their money on.  Put savings, debt payments, and investing on automatic pilot.  Let the HR department do the work by transferring your money where it needs to go.  Or, you can set up an automatic transfer at the beginning of the month.  Create a saving, debt, and investment plan, and after that, you can spend the rest!  Setting yourself up for success is best to avoid the Diderot Effect.

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