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Is ‘Keeping Up With the Joneses’ Putting You in Debt?

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If your co-worker’s fancy new house has you yearning to upgrade, you might want to consider just how much influence “keeping up with the Joneses” is having on your finances.

A recent research paper published by the Federal Reserve Board of Governors looks at the relationship between rising incomes among the top 1% of wage earners and the borrowing habits of those earning less.

“One potential consequence of rising concentration of income at the top of the distribution is increased borrowing, as less-affluent households attempt to maintain standards of living with less income,” the paper concludes. In other words, people making less are seemingly borrowing to keep up with “the Joneses,” particularly when it comes to home-related debt.

In fact, the research found that people who live in high-income areas take on more housing-related debt and have higher debt-to-income ratios than similar wage earners living in less-affluent areas. Other recent figures unrelated to the study show that borrowing in the U.S. is at historic highs, with outstanding mortgage and auto loans both topping $1 trillion in 2016 and credit card debt not too far behind.

“Household borrowing and debt payment does respond to changes in top-income levels, and … this response is primarily concentrated in housing-related debt payments and among households in the upper-middle and middle portions of the income distribution,” the researcher, Jeffrey Thompson, wrote. “These households are going into greater housing-related debt in places where top incomes are rising faster for reasons that cannot simply be explained by home prices …”

A similar research paper released by the Federal Reserve Bank of Philadelphia recently looked at people who live in the same postal code as Canadian lottery winners. It turned out that as the newly wealthy neighbor made new purchases, those around them did the same. In fact, for every $1,000 won, bankruptcies rose by 2.4% among neighbors.

When it comes to buying a home, what you can afford and what makes sense in everyday life can be two different things. It’s especially easy for first-time buyers to wind up “house poor,” meaning their monthly housing expenses eat up most of their discretionary income.

No one expects to lose a job, go through a divorce or face a medical problem. So you want to make sure you’re in a position to stay current on your mortgage and meet other obligations each month. Part of that includes taking all the necessary steps to ensure you’re not paying more than you should.

Before considering a mortgage or making a major home improvement, it’s a good idea to assess your finances. This is especially true since lenders look at the relationship between your monthly debts and income as part of their underwriting and mortgage approval process. (You can calculate the lifetime cost of your current debts here.) To that end, you should also have a good sense of your credit score. You can see two of your credit scores for free every month on Credit.com.

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Image: Susan Chiang

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  • wiseowl43

    It isn’t keeping up with the Joneses; it’s keeping up with the Gates, the Romneys, the Clooneys, etc. See Juliet Schorr’s book The Overspent American, not new but very relevant.

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