Lessons from Iceland’s Meltdown into Materialism

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From The Charleston Mercury, Thursday, September 20

Remember Iceland’s collapse in 2008?  It’s an amazing story.

Iceland is a tiny country with only 320,000 people. Yet, starting in 1994, this nation of fishermen and farmers became an international financial center. Its three major banks increased their assets by the end of 2007 to an astounding 923% of Iceland’s GDP. Personal income soared. GDP per capita was one of the highest in the world (39% more than the U.S.). However, the widespread affluence of the entire country was, in fact, a mirage. Households had debt of 250% of their annual income. When the world financial crisis came, Iceland’s banks and economy collapsed. A country built on materialism and consumer spending had gone bust.

Before the collapse, two professors, Ragna Garoarsdottir and Helga Dittmar, started a study to compare materialism, debt and financial well-being. Iceland was their lab. Recently, the Journal of Economic Psychology published their results. The conclusion was that “people who endorse materialistic values have more financial worries, worse money-management skills and a greater tendency towards compulsive buying and debt.”

Their study pointed out that in consumer societies, materialism has long been considered a national goal. Hard work produces higher income which results in more consumption and therefore higher living standards. GDP has long been considered a proxy for a nation’s level of well-being. If so, then one might suggest that for households, greater consumption, or materialism, would produce greater financial well-being. That just isn’t the case.

Garoarsdottir and Helga Dittmar’s study focused on five variables; materialism, money-management skills, tendency to spend, compulsive buying, and financial worry.  Respondents were asked  to measure how much they agree or disagree with statements such as “The things I own say a lot about how well I’m doing in life”, “I always know how much money I owe”, “I spend extra money quickly”, “I sometimes feel that something inside pushes me to go shopping”, and “I worry about my financial situation.” They summarized the results and compared the variables for correlation.

Materialism has been defined as the “importance ascribed to the ownership and acquisition of material goods in achieving major life goals.”  This Icelandic study concluded that the level of materialism is related to “higher levels of financial worry, a greater risk of compulsive buying, and higher debt.”

Their conclusions don’t surprise me. Financial well-being doesn’t result from materialism. On the other hand, a realistic financial plan can help promote and provide financial well-being. Such a plan identifies goals in three categories; Needs, Wants and Wishes in that respective priority and requires tough choices based on income. Materialism puts Wishes as top priority and tries to find ways to fund them. That’s a bad strategy.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago. Les may be contacted at (843)-577-2463 or les@dwmgmt.com.