Ramit Sethi Says This Is the 'Beginning of Every Financial Disaster'

It's a decision that rarely ends well.

Some money mistakes aren't too big a deal in the grand scheme of things. Others can have huge financial repercussions, and they're the ones you want to avoid at all costs. Personal finance guru Ramit Sethi, author of I Will Teach You to Be Rich, recently pointed out one of those costly mistakes, and it's something that gets a lot of people into money trouble.

What Ramit Sethi calls the "beginning of every financial disaster"

In an episode of Sethi's podcast, he was speaking with a couple who had purchased a vacation home. It ended up costing them quite a bit more money than they expected, so Sethi talked to them about why they bought it. They brought up how they live in a more modest home than their friends, and that even a friend who didn't make as much money had bought a nicer home than theirs.

Sethi immediately pointed out that "this is the beginning of every financial disaster." And, blunt as always, he added that "the worst thing in the world is finding out your friend who is stupider than you has more money."

Now, the disastrous part isn't finding out that your (possibly less intelligent) friend has more money than you. It's wanting what your friends have and basing your spending decisions on that. Or, as it's traditionally known, "keeping up with the Joneses."

In this case, the couple on Sethi's podcast were envious of their friends' homes. But there are many ways this feeling can manifest. People get jealous about cars, clothes, vacations, and much more. Social media hasn't helped matters, as it often contributes to this kind of lifestyle envy. A Point survey even found that 45% of respondents went into debt to buy something they saw on social media.

Why lifestyle envy costs you money

It's completely normal to want to keep up with the Joneses. Most people have probably dealt with this feeling at one time or another. It's acting on this impulse that's problematic.

Going back to that couple on Sethi's podcast, their vacation home went from a dream to a nightmare. It ended up putting a huge strain on their finances, to the point where their best option was to sell it, even though they'd end up losing $100,000.

That might seem like an extreme example, but it's not exactly out of the ordinary. Let's say your neighbor buys an incredible new car, and you decide you want one, too. The average new car price just hit nearly $50,000, and if it's a luxury vehicle you're after, the average is $66,660.

Even with smaller purchases, this can still become a bad habit that leads to bigger financial issues. Once you get into that mindset of "I deserve what my friends have," it's easy to keep using it to justify more and more spending.

How to keep your spending under control

To be clear, there's nothing wrong with spending money on things that make you happy. In fact, it's smart to set aside some money in your monthly budget for this. But there are a couple of caveats here.

First, they should be things that actually make you happy -- not just things you buy to keep up with other people. And they should fit in your budget.

As mentioned earlier, lots of people feel lifestyle envy, and it's not always so easy to get rid of it. I've gone through it myself. Here are a few tips that have been helpful for me:

• Remember that appearances don't always tell the whole story. That friend with the designer clothes could be deep in credit card debt and have nothing saved for retirement. Just because it seems like someone has it all doesn't mean they're doing well financially.
• Keep your own financial goals in mind. Think about how a big, unnecessary purchase is going to impact those goals. I like to consider how much more that money could earn in compound interest if I invested it instead of spending it.
• Set aside a portion of your income for guilt-free spending. Ramit Sethi recommends reserving 20% to 35% of your income for guilt-free spending. While the amount you set aside depends on your income and expenses, it's important to leave some room for fun money in your spending plan.
• Figure out what you really like to spend your money on. Maybe a nice car is important to you because you drive a lot, or perhaps you'd rather avoid spending too much in that area so you can travel more. Take some time to figure out your spending priorities so you can use your money wisely.

Spending money to compete with others is, just like Sethi says, a path to disaster. If you can avoid doing it, you'll be much happier and better off financially.