It 1765 in France. Denis Diderot is a well-known author of encyclopedias. Despite his fame, he was on the brink of poverty. It was at this time that Catherine the Great, the Russian empress and lover of books, heard of Diderot’s plight. Having a soft spot for authors, she decided to buy his library for what amounted to about $150,000 in today’s dollars.
With a daughter who was soon to be married, Diderot was over the moon. Now, he could afford to give his daughter the wedding she deserved. Yet, as his fame increased, he was gifted a scarlet robe. This scarlet robe would serve as a Trojan horse in Diderot’s financial life.
As he looked himself in the mirror wearing a robe befitting of a prince, he noticed the remainder of his surroundings. His furniture was now out of place. Someone who owned a scarlet robe could not sit on such lowly chairs. The old rug was not nice enough either. The feet of someone wearing a scarlet robe should walk only on a rug from Demascus!
In the end, Diderot’s brush with fortune and fame (and a scarlet robe) led to what is now called the Diderot Effect. It is this same effect that haunts anyone who experiences a rapid rise in fame or fortune today.
The Physician’s Diderot Effect
While I assume that most doctors do not own a scarlet robe, many decide to purchase a home worthy of a doctor the second that they finish training.
Yet, it isn’t the home itself that often sinks the doctor. After all, doctors earn a good income. We can usually afford most mortgages (though I’d recommend you try to stay between 1-2 x your annual salary when purchasing a home).
When we buy the home, we feel the need to upgrade much of our belongings. The kitchen table that was just fine in our old place has now been downgraded to the breakfast table. Of course, this means we need to buy a proper dining room table.
Oh, and there are the extra couches, televisions, and outdoor furniture we also need to buy.
And that’s just the Diderot effect on the inside of the house!
The moment that you move into that new neighborhood, you will notice other things, too. Like how all of the lawns are perfectly manicured. I guess that means you need a lawn service! And everyone else is driving a BMW or Tesla. Your ten-year-old car isn’t going to fit in now.
Very quickly, the purchases can rack up. This is why buying a new home is the most coming physician version of the Diderot Effect.
Battling the Diderot Effect
The urge to fill up a new home is very real. Trust me, we have had to consistently fight this struggle since buying a new home two years ago. However, we found some helpful ways to fight the good fight!
1. Write Down Your Goals
The first way to fend off the dangers of an upgraded lifestyle is to write down your goals. This includes figuring out what you really want out of life using The 3 Kinder Questions.
If you know that you need to save a certain amount of money to be financially independent by age 50, then you will be less likely to spend money that should be going towards your savings rate. Particularly if you have written it down.
There is something to putting to pen to paper that makes a goal more tangible. It will also help produce some accountability that didn’t seem to exist before. On the side of our refrigerator (next to where I make my morning cup of Breakfast Tea every day), we have a list of some of our financial goals.
This helps us remember where we are heading and why.
2. Understand Happiness Economics
Just like in medicine, knowing some of the studies proves helpful. If you believe the findings, you can remind yourself that the new car, dining room table, outdoor renovation, television, etc… is not going to make you any happier.
Here are some of the most commonly cited findings from happiness economics and behavioral finance studies:
- Long term satisfaction does not increase over a household salary of $75,000 – $105,000 (depending on location).
- Purchasing items (cars, tables, televisions, etc) provides much less happiness than spending money on experiences or providing money to someone in need.
I remind myself of these truths frequently. It also helps to look back at our life before we moved into our new home where I realize how happy we were then, too. The new house is great, but it hasn’t resulted in more happiness in our family. That comes from somewhere much less superficial.
3. Social Arbitrage
One of the most effective ways to avoid spending unnecessary money is to associate yourselves with the right kind of people. What I mean is to surround yourself by people who have similar views on money, values, and priorities.
This is what I like to call social arbitrage. Because our closest friends spend money very intentionally, it makes it easier for us to do the same.
Similarly, we also obviously have friends and family who do not have a physician’s income. This keeps us grounded in reality.
The deeper you go into social circles with “deep pockets” the harder it is to live differently than them. Suddenly, your children will be attending the same private schools and you’ll be driving similar cars. This isn’t to say that it is impossible to spend differently than your closest firends, but it is very hard.
4. Spend Some Money (Intentionally)!!!
It is not all bad news, though.
In fact, one of the best ways to deal with the Diderot Effect for physicians is to spend some money. However, the key is to spend this money intentionally.
Intentional spending prevents buyer’s remorse and allows us to truly enjoy where we spend our money. The best way that I’ve found to help people accomplish this goal is to adhere to The 10% Rule. Using this rule, you build wealth with 90% of any bonus or unexpected payments you receive and enjoy the other 10% guilt-free.
Once your debt is at a minimum, The 10% Rule can quickly become a 25% or 50% rule. When you are debt-free (or at least debt-free outside of your mortgage), I think it is more than acceptable to enjoy more and more of this sort of money.
5. Money Coaching
Finally, if you still have a hard time keeping your spending in check. Or you are fighting a scarcity mindset that constantly tells you to keep up with The Joneses, there is another solution. Money Coaching.
Money coaching involves working on the thoughts we hold about money. For example, that money is scarce. That our happiness is tied to our spending. Or diving into the fact that we spend money to buffer some of our negative emotions.
In fact, many physicians spend money in order to find the happiness and satisfaction that they feel is lacking at work and/or at home. This sort of hollow spending habit will result in more debt, less satisfaction, and feeling trapped in your physician’s income.
Purchasing a home is the most common example of the Diderot Effect for doctors. Surely, there are others. However, knowing how this effect works is paramount to avoiding the most common (and catastrophic) financial mistake a physician makes – growing into your income too quickly.
Did you experience the Diderot Effect when you bought a new home? What happened?
Did you defeat it? Leave a comment below.