The Notorious Dr. JonesWe all know that doctors have a spending problem. We see that first paycheck and face the temptation to spend every single dollar. The are many reason for this phenomenon. The first is that we want to release all of that delayed gratification that we built during our long years training to become an attending physician. However, the spending doesn’t stop there. Even after we let the lifestyle creep occur (without utilizing The 10% Rule that would keep it the creep in check), most physicians continue to spend tons of money with each passing year. The main reason for this secondary phenomenon is that physicians feel called to keep up with Dr. Jones, instead of following Dr. EFI. This phenomenon results from both internal and external pressures. And it is this external pressure I want to focus on today. This is where social arbitrage comes into play.
Social ArbitrageSocial arbitrage is the idea that the people we most closely associate with in life will help determine many of our financial decisions whether we realize it or not. Yes, we can feign strength despite all of the expensive homes, cars, and private school kids that surround us… but we are all humans. Stuck between Scylla and Charybdis, we will eventually succumb to the siren song of spending more money to keep up with our friends and neighbors. For this reason, we must choose our closest friends and the people we most closely associate with very wisely. If we choose to associate with frugal friends, we have chosen the life of social arbitrage. These friends can provide the same happiness to our lives while we avoid the expense that comes with having friends who live the lavish life. That is social arbitrage. And behavioral finance and the psychology of money help support this premise.
Mirroring and Brain CouplingWe have discussed the idea of mirroring and brain coupling before on this blog. The idea here is that when you closely associate with people, you begin to click on the same wavelength. It is a well-known phenomenon that describes many of the things we do when surrounded by close friends and family. If you find that all of your friends live an expensive lifestyle, you will subsqeuently find yourself spending the same kind of money. On the other hand, if you live in a neighborhood with people of more moderate means and are surrounded by friends who spend much less on a daily basis, you are likely to spend less, too. Social arbitrage is at work here. Choose your friends wisely. More importantly, choose your spouse wisely! And, if you are having trouble getting on the same with your spouse, then read this post.
Taking Advantage of Social ArbitrageHere are some practical ways to apply the principles of social arbitrage. First, you should wait to buy the “doctor house” after you finish training. Don’t fall prey to the idea that a bigger house will make you happy. Read more behavioral finance articles and realize that this is not one of the ways we can spend money to find happiness. This is important to understand because not only will a bigger house fail to make you happy, but it will also encourage you to spend more money. You would likely be perfectly fine having $500,000 in savings early in your career. Unless, of course, you are surrounded by people who have millions of dollars in family money. Second, choose your friends wisely. In the words of the Playing with FIRE documentary bumper sticker I received: “Frugal Friends Unite!” Frugal friends will encourage you to do wise things with your money, and hold you accountable when you have feelings of straying towards things that aren’t good for you or your finances. On the other hand, friends that encourage you to spend every dime (or spend every dollar that they make) are tough company to keep. If you do, you will find yourself spending money, too.
Take HomeRemember that it has been said that you are “the average of the five people you spend the most time with.” Choose your friends wisely and build a good team of people that can surround you, support you, and encourage you to do the right thing. Given the financial literacy problems that exist in this country, it is paramount to your success to social arbitrage your way to success. That way, you can withstand all of the pressure from others that would have you save too little, too late.
What do you think about social arbitrage? Is this a ridiculous notion, or do you notice you spend more money when surrounded by certain people? Leave a comment below.
I do believe in social arbitrage as there is a tendency to try and keep up with your peers so you don’t feel like you are the odd one out.
It is a lot tougher for a physician because of the circles they typically run in and society’s expectations and thus a lot of physicians do end up with a spending problem to maintain the facade.
I tend to gravitate towards the low key individuals and don’t need to be seen in the higher society circles/featured in local magazines, etc. That kind of lifestyle is hard to maintain financially.
That is also the reason why living where I am helps tremendously (live 35 miles away from work in a very rural area).
I agree that it is intrinsically harder for physicians because of the social circles we swim in at work. To some extent, this is impossible to escape completely. It is worth escaping when we can, though.
Well said TPP! One can socitrage and geotrage at many levels and often accomplish both even locally by downsizing to a smaller home in a more cost effective neighborhood of like minded Smiths instead of Jonses. We moved from Chitown to Knoxville in one step and are now completing the “trage” by locally relocating to our “live like you are retired” home next year. Radical downsizing and arbitraging is like a cold shower in the deep end. A stepwise plan is actionable and digestible and not like “the pig and the python dilemma”.
I am reposting this excellent piece at Financial Literacy Project. Bravo!
Thanks for sharing, Bill. It’s amazing what arbitraging can do!
I’m lucky to have a few frugal friends whom I’ve been close with since long before medical school. It helps sharing hobbies that are inexpensive, but more important is the lack of any need to compete with one another in houses / cars / etc. I do tend to agree this is an overlooked point in discussions on geo-arbitrage.
Keep those friends around!
I’d like to think I have inexpensive hobbies, but then I remember how bad I am at golf. Golf by itself is expensive. Bad golf is much worse!
My friends have never been particularly frugal. I’ve got a wide economic range of them, from millionaires next door like me, to hundred millionaires, to billionaires, to middle class, to a few financial dumpster fires. I don’t make decisions on what I spend based on any of their lifestyles. We spend based on what we value, always have. Still in our first house going on 40 years now. Our cars have 150,000 and 180,000 miles on them. One of my friends was driving a new car this week, $150,000 minimum, probably closer to $180,000 depending on the options. Good for her, I could afford one too, but a car that cost more than my house seems a little much. But to someone with several houses, a jet and an island it’s actually pretty frugal.
It is possible to find success despite being surrounded by friends that are not on the same page financially, but it is an uphill climb that requires dedication, discipline, and focus. It can be done, though, and you have lived it.