Here's How Talking about Money Can Backfire

Especially if you're struggling financially and your friends aren't

Photo by Vitaly Gariev on Unsplash

There’s a widely held belief that talking about money is a good thing.

The idea that talking about money with your friends and colleagues can help you make better financial decisions makes intuitive sense. I’ve long been of the opinion that talking about money is the first step to taking action related to your money.

But, like all things in life, this is more of a general—not absolute—truth.

In this article, I’ll review research that shows that, in certain circumstances, talking about money can hurt you financially.

If you talk to your coworkers about retirement, are you more or less likely to save?

A 2015 research paper asks how knowing what our coworkers are doing with their retirement savings affects our own decisions.

The study specifically looks at whether sharing information about coworkers' savings behaviors can encourage others to save more or, surprisingly, lead them to save less. The researchers were trying to figure out if knowing your coworkers financial goals might make you more determined to save or leave you feeling discouraged because you're not where they are.

The researchers used data from a large manufacturing company's 401(k) retirement savings plan involving 15,000 employees. The data covered various aspects like employees' age, gender, tenure, salary, and their current participation and contribution rates in the retirement plan.

Employees who weren't saving much—or not saving at all— were given simplified forms to either start saving in the plan or increase their contributions.

Some of these forms included information about how many of their peers of a similar age were also saving. The twist was that this peer information was given to only some employees, while others received forms without this extra detail.

This setup allowed the researchers to compare how peer information influenced people's decisions compared to those who didn't get that nudge.

The surprisingly negative impact of knowing how much your coworkers are saving

The results of this study reveal some surprising and nuanced insights into how knowing how our peers are saving for retirement affects our own retirement savings. F

The study found that employees who were not saving anything in their 401(k) plan, were less likely to join the plan—comapred to those who were not saving anything but were given no information about what their coworkers were saving.

• 10% of non-savers who received no information decided to enroll in their 410(k) plan.

• Only 6.3% of non-saviors who did receive information about how their coworkers were saving decided to enroll themselves.

Basically, if someone told you that Fred from accounting was saving 10% of his paycheck for retirement, you might be less likely to start saving after hearing that.

This suggests that instead of being motivated to join because "everyone else is doing it," some employees might feel discouraged or overwhelmed, possibly thinking they'll never catch up to their peers.

In this case, knowing what others do with their money is not motivating but discouraging.

The study also found that these same employees were even less likely to save if they were told a higher percentage of their coworkers were saving.

A 1% increase in the reported fraction of coworkers already enrolled in the 401(k) plan led to a 1.8% decrease in the enrollment rate for non-savers.

But wait, it gets worse!

Knowing that more coworkers were saving also had a negative impact on those who were already saving for retirement. A 1% increase in the number of coworkers saving caused savers to lower their own contribution rate by 0.11%.

What is not surprising is the role that income plays in all of this.

How you feel about your income will determine how confident you are in achieving just about any financial goal. Your income is the most important factor in your personal finances.

This study provides even more evidence of the impact of your income on your financial confidence. The researchers found that lower-income employees reacted more negatively to peer information compared to their higher-income counterparts.

This makes perfect sense; if you are not happy with how much money you make, and you are not saving anything—and then someone tells you how much your coworkers are saving, you’re more likely to feel discouraged

This research is another data point on the destructive power of ‘social comparison’, which is when you compare your financial situation to someone else’s. Which I think is the real danger when talking about money with your friends.

If your friends have a lot more money than you do, odds are you are going to walk away from that conversation comparing yourself to them—and that probably won’t make you feel good.

So, I think the real lesson here is that talking about money isn’t bad, but it’s usually best when you do it with someone who’s in a similar financial situation as you.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.