Rarely when you are attending a business meeting or looking at a presentation, are you able to avoid the word average mentioned multiple times. “On average our sales grew 20% from last year”, “On average people do not eat enough vegetables”, the list goes on but you can find the word everywhere. I believe this is due to the fact that an average or mean is the first way we learn to analyze a set of data at school, and it just stuck with us. There are of course use cases for an average to be helpful and meaningful but for the most part, it gives only a partial picture of the truth and might even be misleading.

Let's say you need to hit a golf ball on the green that is 95 meters (312 feet) away, half of the time your ball lands short at 90 and the other half goes over to 100. None of the balls hit the target but on average you are spot on and your shots are very accurate!

When measuring the net worth of the people in a bar the average was 50 million dollars. Elon Musk was having a beer at that moment at the bar.

Silly examples but as accurate and informative as many of the averages that you read about and possibly even compare yourself with. Unfortunately this Vanity metric is fed to us all the time when we search for any information that is quantifiable. There are use cases and actually helpful information that averages can provide us but these should always be looked at as starting points where to start looking, not as a fact to make large decisions on.

Averages in personal finance

Let's start off with some examples on where averages could be used. You are planning to apply to your first full-time job in a city you have not lived in before. You need to figure out how the salary levels are in the field in that area. This is a good starting point, you find some statistics on this and decide a number on what to ask as a starting point. This is good, as long as the source is reliable you just managed to find the right spot where to start looking. You could still ask some local forums for confirmation regarding this but starting salaries do not usually vary that much.

Now you have been working in the field already for 5 years and become an expert in it. You are moving again to another location with similar income levels. Looking at the average salaries on the position you are applying to in that city gives a number that is lower than your current salary. Should you ask for less as the average is showing this in some statistics that you found? No, you know the value you are able to create and bring to the company, as the income levels are similar you know that you can start the negotiations at even slightly higher than what you made earlier.

Sticking with averages in this situation would have cost a lot of money as the salary would have decreased and the opportunity cost for actions in your life would have been significant.

Another quick example is mortgage interest rates. You start applying for mortgages and find some statistics that the average is around 5.5%. Should you just go with this interest rate as it's the one that you got offered from the first bank you applied to? No, ask for more reference points and forget about the average. After asking for more offers you get a much better deal with less fees for 4.5% saving you hundreds of dollars each month. These types of cases I have seen multiple even in my own life so remember to ask, won't cost you anything.

Our psychology loves averages

We love to read about averages and compare our own circumstances to these graphs. I believe it gives us a familiar environment that we understand and is easy to interpret. What this familiarity feeds is the need for us to compare ourselves with others. We are social animals and we have always lived in groups and communities. Comparing ourselves with others gives us an indication of our status and where we stand in the group and possibly even gives us feedback on how to enhance our position in it.

The common starting point is “is it just me?”. Well, the answer is always no. The question on the other hand has two ways to look at it. Are we upwards or downwards comparing ourselves to others? The difference is that we compare our performance upwards so that we can enhance our performance, the main focus is self-improvement. Or are we downwards comparing meaning that we are focusing on making ourselves feel better of ourselves and our circumstances.

In general comparing ourselves with others has a strong influence on how we see ourselves and self-esteem. Issue is that we tend to compare our weaker qualities against someone's stronger qualities and generate a totally deformed image of reality. Comparing ourselves to a pro level athlete might give the “I'm never going to be able to do that..” or make us even more motivated, depending on the mindset we have. This all has been escalated by social media and for the most part not for the good. Quite often we end up comparing ourselves to some made up highlight of someone's lives which has nothing to do with reality. Many of us understand this but still fall victim of this comparison and the negative that it brings.

Thinking in averages is breaking your health

The constant comparison that is happening is quite often something to do with finances. You can find various lists, news or social media posts regarding all kinds of averages regarding financial standings.

Forbes - “How Your Retirement Savings Compare To The National Average”

CNBC - “How much money Americans saved in 2023 at every age—and how you can put away more this year”

CNN - “The average American savings: How does your savings account compare?”

Many more examples can be found online regarding these endless comparisons on average savings and investing amounts.

Reason why I believe these types of news or media posts are not helping anyone but doing more harm than good is because of the pressure it creates. What these averages create is an illusion of the norm and by not being part of the norm, our brain starts creating weird images regarding our situation. When we are outside the norm, anxiety and fear of being different or not fitting in starts creeping in. When these false benchmarks start taking hold of you the perfectionist in you might take over and a high possibility for chronic stress and burnout is very real. At this point you start losing compassion towards yourself and people around you that might even start affecting your relationships in general.

So always when reading and comparing your financial situation to some news or social media post, take it with a grain of salt and only use it as a starting point or compare yourself upwards and learn from it rather than letting it take you down a negative path.

How to avoid the negative competition averages create with our finances

The main thing with keeping yourself on the track with reaching your own financial goals amongst the culture of comparison is to create goals that are easy to focus on. What this means is that you need to build clear goals with your finances that are built on your own wants and needs that you want to achieve.

By making the goals clear and achievable makes them much stronger in your mind also and the habit becomes more natural. Focus on your path and goals, forget about what your friends, family, colleagues and neighbors are doing. Long-term plans are very hard to stick to but by breaking it down into smaller achievable goals it becomes much more realistic and rewarding.

First step is to build a budget, there is no way around it even if you do not like the process. After your income and expense picture is clear, make clear goals you want to achieve that are realistic with your circumstances:

• I want to have 1000$ in my emergency fund.

• I want to save and get a new laptop so I can work on my project easier.

• Start investing 100$ each month into index funds

By making the goals clear and achievable makes them much stronger in your mind also and the habit becomes more natural. Focus on your path and goals, forget about what your friends, family, colleagues and neighbors are doing. Long-term plans are very hard to stick to but by breaking it down into smaller achievable goals it becomes much more realistic and rewarding.

Averages won't help you very far in life, rather focus on absolute values that are building your future towards your own goals.