Over the past few months there has been several infographics detailing out what has been coined the “Iceberg Effect”. Typically, you see a two-dimensional picture of an iceberg with the word success written across its cap and words such as hard work, late hours, failure, etc. littered throughout the submerged piece. The point: people only see the success of others and miss everything that helped create that success. This metaphor is simple, powerful, and can be universally applied – even to financial planning.
One of the many benefits of our job is having the privilege to work with many wonderful families and individuals. Our clients recognize the number of people we partner with and often ask “How do I compare to the rest of your client base?” The answer we provide is typically not what someone would want to hear as we constantly state “I can’t compare you to our other clients, as your situation is truly unique resulting in an apple to orange comparison.” After we respond, the clients continue to probe “Well, what about people close to my age with similar assets and debt?” And again, we answer the same way: “Comparing other clients around your age with a similar situation in regard to assets and liabilities is once again an apple to orange comparison.” The rationale behind these questions makes sense as our clients are seeking a benchmark to compare themselves to. How else are they supposed to know if they are doing well?
Wanting to compare ourselves to others is drilled into our heads from a young age. Our school system inherently compares students, leading to special classes or enrollment in certain schools. In sports, athletes go through tryouts where they are rated against one another to earn a spot on the team. At work, you are compared to others in your industry with similar job functions in order to set your wage. We are constantly comparing ourselves to everyone around us. Comparisons are efficient; it allows for a baseline to be created that streamlines the evaluation of others. However, there are flaws to comparisons as it cannot always be quantifiably measured. For example, Tom Brady, arguably one of the best NFL quarterbacks of all time, was drafted in the 6th round of the 2000 NFL Draft. The reason: his physical ability was subpar in comparison to his peers.
Our propensity for comparison leads us straight into the “Iceberg Effect” and even more so when it comes to our personal finances. When clients are looking to compare themselves to others they want to compare the hard data. For example, client A goes through an expense analysis and finds out they are spending 35% of their discretionary budget on dining out and would like to know how this compares to other clients. After examining the data it’s found that on average only 15% of the collective group’s discretionary budget goes towards this category. From a comparison stand point, the advisor should recommend client A reduce the frequency of going out for a bite to eat. However, in further discussion the advisor begins to uncover more details. She finds out that the clients’ entertainment bucket is almost zero, their clothing expense is minimal, and their grocery category is practically nothing. Furthermore, she discovers dining out is a way for the couple to connect and they look forward to it every week. So much so, they were willing to give up other spending to preserve this activity. This is the “Iceberg Effect” in action. From a bird’s eye view, client A is spending an exorbitant amount on dining out, but underneath the water you begin to see why that is the case. And to further complicate the issue, what if client B could care less about dining out and loves clothing instead? The comparison now becomes irrelevant. This example is not only isolated to spending, but to objects as well. Clients will see others with big homes, new cars, or hear about the trips others take – they see the cap of the iceberg. The issue: they will never see what lies beneath the water. We on the other hand have the privilege to see the two-dimensional picture. We see if the cap is about to flip over because it is becoming too heavy as the submerged bottom has been eroded by debt. Or if the cap is small, but underneath lies a large inheritance. In addition, we get to understand the decision-making process behind such spending. And it comes as no surprise that we find out everyone values their dollar differently.
Our answer does not provide a solution, so we must take it a step further. When looking to gauge how you are doing you must first understand what you value (take a look at our blog “OPPORUNTITY COST…THERE IS NO SUCH THING AS A FREE LUNCH” for further explanation). Then you need to sit down and talk about what goals you have. Do you want the big home? What about travel? Or do you want a new boat? From there you can begin to pin down what you truly value and begin to allocate your dollars more effectively. After that you can begin to gauge your success, like did you buy the new boat with cash or debt? Is your emergency fund finally at a sustainable level? This exercise begins to change the benchmark from everyone else to your future self. Now, instead of only seeing the cap of the iceberg, you begin to see the entire thing. Recognizing that everyone else’s situation is different is key to understanding your financial success. Everyone is different, so the only real comparison is to your future self. You do not want to be in the position of the Titanic, because we all know how that story ended – the iceberg won.
We will leave it up to James Broughton to sum up this blog as he once stated, “Trusting your individual uniqueness challenges you to lay yourself open.” Once we can do that, we can begin measuring our true success.