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This is a guest post from Mike Young, who runs The Secure Student, a program that teaches high school students how to manage their money.
In high school, I had a small allowance from my parents every week. When I spent my allowance on gas, food, whatever — that was it. I had to wait until next week before I saw another dime. I remember having to really think about what I spent my money on, and to plan ahead for expenses such as gas and entertainment. It seemed easy: “I’ve got to make this money last until next Monday.”
When I graduated from high school, I had a full baseball scholarship and was receiving money for living expenses. Meanwhile, my allowance from my parents increased. I was also able to find part-time work that kicked in extra money. It seemed as though the next step was natural: I bought a new car.
That’s where things began to get foggy for me. Somewhere between $50 per week and several hundred, I lost track of what was actually coming in and going out. I figured that since my income had quadrupled, there wasn’t any need to watch every penny. Big mistake!
The next thing I knew, I was 22, over $8,000 in credit card debt, and had ruined my credit score. In hindsight, the car I bought was too expensive for me at the time, and those credit cards that were so easy to get, weren’t suppose to be used to buy dinner for my friends. Lifestyle inflation had caught up to me. My lifestyle had surpassed my income.
I took a step back. When I finished school, I found a job that paid me over $50,000 per year. I vowed to pay back every penny of debt — and I did. With the help of an FHA loan and improved credit scores, I bought my first home.
Then things got tricky again. My income went up dramatically — to over $250,000 per year! Apparently, I hadn’t learned my lesson. I bought a newer bigger house, bought a new car, and started my own business. Big mistake!
Before I knew it, I was 30 years old and lifestyle inflation had caught up with me once again. I was in debt, the house and car had eaten away all of my savings, and my income fell to around $100,000 per year. I’m sure you’ll agree that $100,000 is a lot of money, but can you believe it? I was still falling deeper into debt every month.
It was at this time that I began to read every financial book I could get my hands on. Both Financial Peace and Your Money or Your Life had a huge impact on me. I realized that unless I determined my “enough” number and became content with the Stuff I had, I would always battle lifestyle inflation.
Lifestyle inflation affects most of us, especially young adults. That’s one reason I started The Secure Student Program, which teaches high school students how credit and money work, in the hopes that early financial literacy will help them avoid some of the mistakes I made while “growing up” financially.
Today, at 35, I feel like I’ve finally defeated lifestyle inflation. My wife and I track our expenses regardless of income, and we budget and save on a regular basis. We also have a financial plan for each year and each quarter to measure how well we’re doing. We focus on financial progress and not perfection, which helps us to not feel stressed if things don’t go as planned. We’ve finally found a system that works for our family, and that’s the most important part of financial planning.
Photo by Sister72.
This article is about Basics, Psychology, Real-Life Thursday, 5th March 2009 (by J.D. Roth)
March 5th, 2009 at 5:19 am
It sounds like you and I have traveled similar paths. Congratulations on your arrival and I applaud your efforts with students.
March 5th, 2009 at 5:49 am
When I first made a significant amount of money from my writing, my husband and I went out and bought a $1,500 TV. Then we stopped and looked at things. We realized that if we spent everything we made, it didn’t how much money we made — we would never have enough. It can be tough to rein in when you start making more money. But the fundamentals of good financial management apply, no matter how much money you make.
March 5th, 2009 at 6:11 am
This was a wonderful post. There have been several points in my life when “splurges” morphed into necessity. When my husband and I took our first Caribbean vacation, it was a real treat. Then, next winter, we thought, “wouldn’t it be nice to be on the beach?” It became a habit to take a nice vacation every winter.
The problem is, once you try to cut the item out of your budget, it feels like deprivation. Or, in the author’s terms, “lifestyle deflation.” But we’ve had to do it: my husband and are both self-employed now so we need to be more careful about cash flow.
March 5th, 2009 at 6:21 am
Sounds like you learned a good lession. I remember reading once that people always want to get to the threshold right above them, “If I make just xx dollars more, I’d be happy.” I believe that’s how spending works, too. They start to buy just above their income level to be happy, only to realize that they’ve put themselves in debt. Congrats on getting out. And your class for high schoolers sounds amazing. That is just what this country needs.
March 5th, 2009 at 6:43 am
When I speak with college students, I try to stress the dangers of lifestyle inflation. The natural inclination when you get out of school and obtain your first job is to buy a car, get a better apartment, buy some nice furniture, etc. But this sort of thing can be dangerous. it’s easy to jump into a lifestyle you cannot afford.
I really like the notion that many people practice whereby they “bank a raise”. That is, when they get a raise at work, they save that money and don’t use it to expand their lifestyle. This is a great way to do things.
Even better, I think, is to split the raise. Bank half of it, but use half of it to improve your lifestyle. This allows you to enjoy life, while also building wealth. This balance is important.
As for my own life, it suffered tremendously from lifestyle inflation during the 1990s. And the problem wasn’t just that I spent my raises, but that I spent them before I ever received them. I spent in anticipation of raises. That’s why I ended up in debt. I was fortunate to never suffer any reversals. If I had lost my job or something, I would have been in big trouble.
March 5th, 2009 at 6:48 am
All around me, I see people who can’t break lifestyle inflation. People who spent lots of money before they had kids can’t cut back when they have kids, people who lose income or have an emergency don’t know how - or won’t cut back. Years ago, our income was cut in half by a job loss- friends couldn’t understand how we managed better then they did with so much less money. Michele is right- people who think if I just made that much more, I would be happy- will never be happy.
I wish my kids had a finance class. I bought them both “personal finance for dummies”- used and my daughter is a thrift store maven like me.
March 5th, 2009 at 6:53 am
What an excellent post. It is amazing how our spending increases to reach our income, and beyond, just as our “to do lists” expand to fill our every waking moment, and more. With the pain that many are going through with the financial crisis, I think we are being forced to face the lesson you so well document that societies have learned throughout history time and time again.
I love the term lifestyle inflation! I guess an important point to remember is that while we cannot control the national inflation, we can control our own lifestyle inflation.
Thanks for sharing your thoughts.
March 5th, 2009 at 7:01 am
I wonder if all life style inflation is bad. I feel that saving every penny that you get from a raise, may demotivate you to not even care about money. The more money I save the less purpose in money I see. What’s the point? It hard for me to save for the illusteroius retirement at 55 as it is a good 30 years away. I am very frugal, bordering on cheap, person and the greatest fear I have is that i will become a miser.
I have a friend that works in home health and takes care upper class clientele she says that some of these old ladies live like the only make 20k a year. Isn’t that just as sad as over spending to fill an emotional void? Is that really a fulfilled life? Finding the balance is so difficult.
-ThatGuy
March 5th, 2009 at 7:02 am
Good post. Relevant in today’s economy and something I struggle with, but am getting under control.
March 5th, 2009 at 7:02 am
This is an excellent post. I fooled myself for years thinking that I had not fallen into this trap. Compared to my friends, I was a spendthrift.
Comparing myself to others should have been a wake-up call. In any event, as the economy turned south, I was forced to take a second look at my lifestyle.
I found many parts of it were simply WANTS and not NEEDs. Fortunately, my wife and I are on the same page and we trimmed significantly.
Its amazing how reality can turn needs into wants.
March 5th, 2009 at 7:17 am
Amazing lifestyle if you can handle the temptation not to be extravaganza, while still difficult if you are already in habit.
March 5th, 2009 at 7:26 am
I’m finding this increasingly difficult as I get older. I went through graduate school, so my standard of living was pretty low until I was in my early 30s (OK, I did spend a lot of time in Europe, but I was sharing an 18-sq-m room with my boyfriend, toilet down the hall, shower in the kitchen down the hall, phone down the hall, no cable, no internet, no new clothes, no car). But then, you figure things are going to get better, and it’s not a problem putting off some things because you figure you’ll have them later. When you get to be in your mid-40s, it gets harder to convince yourself of that (mind you, my standard of living is a whole lot higher, but now I’m measuring it on the “grownup” scale).
March 5th, 2009 at 7:32 am
I feel the same as Escape Velocity. I’ve been frugal for years, but now in my 40s I’m starting to make that trade-off, giving up some of my money in return for time with my husband & kids, for a little luxury, or just because I’m too tired to keep searching for bargains to keep within a $75 a week grocery budget. OTOH, I have a decent foundation now and can afford a small splurge. Seeing my dad died at 63, before he got to retire, made me realize I need to live life a little instead of just focussing on accumulating money.
March 5th, 2009 at 7:38 am
I think HollyP and EscapeVelocity bring up an interesting notion. When is lifestyle inflation not lifestyle inflation? Or, more to the point, when is it okay to increase your lifestyle as opposed to exercising restraint? I’d like to think that’s one of the themes we’ve been exploring here lately.
For myself, I know it was helpful to have GRS readers point out that I could afford to go to a movie now-and-then or to enjoy a cup of hot chocolate. At some point, it’s okay to spend the money you’ve earned. But, at the same time, as Mike notes in his article, it’s important not to let your lifestyle get out of control.
As with everything, it’s a balance.
March 5th, 2009 at 7:40 am
I think this is something everyone struggles with, especially those with over $100,000+ in income. Instead of saving that extra income, they feel compelled to spend on more expensive items just because they can.
This is something I tell my wife all the time!
March 5th, 2009 at 8:01 am
I think it’s hard to get through to high school and college students about this stuff. With a rare exception, I think sometimes you just have to let them make their own mistakes and learn from it.
I made those mistakes, thankfully not to the extent of some others, but I’m glad I did it then and had time to work it out instead of now 10 years later.
We’re struggling with it again now while looking to buy a new home. We want something big enough to grow into if/when we have a couple more kids, but not something that’s going to drain us financially.
March 5th, 2009 at 8:17 am
Lifestyle inflation is a problem when it involves spending beyond your means. If you’re saving, have little to no debt, and can pay cash for the items you covet, lifestyle inflation is relatively safe and sane.
As has been pointed out in this column before, striving follows wanting and dreaming. Ambition is born from desire. Constant striving without ever finding fullfillment, however, is a recipe for disaster no how matter how much you earn or how much stuff you have. I think the author’s point about finding your “enough” point is the key to keeping your life in balance.
And to ThatGuy, since when does living on $20,000/year constitute excess parsimony? I prepared tax returns for those little old ladies for years and many of them do live on that, or less, but they live in homes they finished paying for decades ago, they don’t feel a need to buy new clothes or cars every year, they travel to see their families, and they have active social lives and connections within their communities. They’ve lived through tough times before and know how to ensure they’ll get through the next hard times. Trust me, they don’t feel deprived, they feel secure. I don’t see a thing wrong with that.
March 5th, 2009 at 8:37 am
This is a wonderful post. Since high school, my cousin and I always said they should offer a finance class to kids, teaching them how to budget and prioritize. My husband used to struggle with lifestyle inflation impluses when after I first graduated college but I was that voice of reason (aka Nagging shrew) reminding him that we aren’t suffering if our apartment isn’t 100sq larger or our car isn’t top of the line.
March 5th, 2009 at 8:38 am
Thanks for a great post! I was intrigued by EscapeVelocity’s comments about the scale of comparison shifting from “student” to “grownup.” When I compare my standard of living now to when I was a student, I feel fabulously weatlthy! But when I compare it to other “grownups,” I feel like a complete economic failure!
I, too, suffered from “lifestyle inflation” by marrying, at 27, a true Hollywood spendthrift. I got very used to using consumer purchases to fill the emotional void in our marriage and in my own life, and in trying to build my low self-esteem by buying fancy European stuff. For example, I saw an older woman’s dressing table with a particular brand of $60 face ointment and, so I could feel as successful as her, ran out and bought it! I’m ashamed to say that seeing that bottle on my own nightstand did boost my ego, albeit artificially. I clung to that bottle for years, long past its sell-by date, so I could remember who I “used to be” before I was a broke divorced broad living in rural Nevada!
I have made SO MANY financial mistakes in my life, due to ignorance, low self-esteem and lack of self-control. Even though I am still digging myself out of debt, it feels very, very good to at least be free of the nagging mental ghosts that urge me to consume conspicuously. The comments on this post are insightful and helpful, and I appreciate all of you.
March 5th, 2009 at 8:39 am
Regarding little old ladies living “parsimoniously” …
My grandmother died last year at the age of 98, after spending the last month of her life in a hospice facility. It took a long time for my father and uncle to persuade her to go into hospice care because she was so frightened of running out of money.
My grandmother was old enough to remember what happened to little old ladies in the days before Medicare and Social Security. I don’t blame her for being frightened. Being elderly, frail, and destitute isn’t a position I’d want to be in, either.
March 5th, 2009 at 8:44 am
When is it okay to increase your lifestyle as opposed to exercising restraint? - This is a question that I have been wrestling with lately too. My husband came with a lot of debt. In the beginning, it was easy to exercise restraint because I was determined to pay off the debt, and in our first year of marriage we completely wiped out $48,000 of debt and had $10,000 in retirement savings (we made $88,000 that year, for a savings rate of 65%). Now that we are out of debt (we just paid off our debt two months ago), we have an aggressive savings plan– we save 50% of our income, and yet we still end up with extra money that is designated as spending money under our savings plan. Sometimes I have a hard time letting that spending money go. I still have to analyze every purchase and weigh the cost versus the perceived benefit and try to decide if that $3 cup of coffee is really worth it, or if I should really buy that book if it’s available at the library. And having a spouse compounds the concept – my husband is definitely a spender and would gladly come up with a long list of items he’d like to purchase with the money. I’m still searching for the balance between frivolously spending the money just because we have it, and needlessly depriving ourselves while we are young.
March 5th, 2009 at 8:57 am
That’s a good post, and something my wife and I will have to deal with soon. She’s graduating from medical school in May, and soon instead of her education being a liability on our balance sheet, it’ll be an asset that produces a significant amount of income. Residents don’t make that much, but the swing is going to be huge - instead of paying 30k for her to go to school, we’re going to be receiving 45k for her to work - a 75k swing in our income. We’re going to be careful to avoid lifestyle inflation. We manage to spend less than we earn right now, but we’re planning on trying to bank some of that money. This is a helpful reminder as to why.
March 5th, 2009 at 9:59 am
It is very tempting to increase spending as your income increases. This can be especially true for students entering the workforce, even for those that graduate with sizeable student loans. I was very fortunate to graduate debt free, and was able to buy a (used) car while in university thanks to summer jobs and a frugal lifestyle (including living in residence or with relatives to save money on rent). Although my salary rose fairly quickly after a few years (from a very low level – articling accountants were not paid much!), I stuck with used cars and bought a house, a tiny semi-detached. When I got married and moved to another city, we used public transit, didn’t eat out often, didn’t take many vacations and, most importantly, didn’t over-extend ourselves when we bought our house. Now, many years later, our lifestyle is still quite similar despite the fact that our salaries have continued to increase.
Our parents grew up during the Depression, and this certainly influenced their attitude towards money. It seems we’ve picked up many of these same attitudes – spend less than you earn, avoid debt, be value conscious (not simply price conscious), and learn to be content with what you have. As JD and others have noted in previous posts, having more stuff, eating at fancy restaurants or jetting off to exotic locales does not bring you lasting contentment.
One other important benefit of limiting lifestyle inflation is being able to save for retirement. Life expectancies are increasing, and if you make it to age 65, your odds of living to 85 are greater than 50%. A little sacrifice during your working years – starting as soon as you enter the workforce - should allow you to live comfortably in retirement.
JS
March 5th, 2009 at 10:16 am
A long time ago, when I thought I was poor, I figured out how much I need per month to live.
That number has not changed. I still maintain that dollar amount in my checking account and that’s what’s available to me to spend. There are two differences between now and then. One, that same dollar amount not only covers the essentials, but also dinners out, drinks with friends, and other bits of fun. Two, in addition to that same dollar amount going into checking, there are now monthly deposits into savings and retirement accounts which there never were before. Now, instead of going into debt when something came up - car repairs, trips to visit family - I can pay for those things out of the money I saved for just that purpose. I no longer carry a balance on my credit cards, I no longer hold my breath at the end of the month, and I no longer feel guilty about enjoying my life.
That makes it worth banking all those raises, and keeping my monthly needs at or below what they were when I was 25 and broke.
March 5th, 2009 at 10:22 am
Like others have implied, lifestyle inflation isn’t always bad. It’s part of the reason we go to work everyday, do a good job, and try to earn promotions. I know that I’ve “suffered” from significant lifestyle inflation over the last three years, but I’m in *better* financial shape now than I was then.
Here’s some of the inflation I’ve gone through the last three years: I moved to San Francisco (where rent is expensive). I bought a sailboat. I traded in an 11-year-old but reliable car for a brand new one. I’ve been to India, Germany, the Bahamas, New York, Chicago, and Seattle in the last year and a half. I got married and have a wife who can stay at home if she wants or needs to.
I wasn’t doing any of these things three years ago, which implies lifestyle inflation. Four years ago I made about $37,000 a year. Even without doing those things I mentioned above, I was spending more than I earned, and digging myself deeper into debt. I broke that cycle about three year ago, and cut my spending to match my income.
Since then, I’ve had a huge increase in salary. Last year I made over $140,000. My lifestyle has increased in all the ways mentioned above. But last year I pretty much maxed out my 401k contribution at $15,000. I paid off $6000 in outstanding debt still left from my mistakes several years ago. I paid down my car loan 50% faster than required. In fact, that car loan is the only debt I’m still paying back, and I plan on paying it off this may.
So now I have savings, I’ve paid off debt, and I still get to go on trips and sail my boat, and I’m able to provide for my family on one income. It’s responsible lifestyle inflation, and it’s something I’ve worked very hard to achieve.
March 5th, 2009 at 10:29 am
And as an aside — J.D., when are you going to invest in a more reliable webserver? Yours seems to be down a lot lately, I’ve been getting a lot of error message for the last week or two.
March 5th, 2009 at 10:42 am
I can relate to this post. Bought a new house and new car last year. The house I bought because it was a good deal, foreclosed home, and the car I bought because my old car (which was paid off by the way) broke on me.
However, I could have been more patient with buying the house since the market tanked even more. Also, I could have perhaps bought a cheaper car. But I’m starting to be better. Cut down on some spending… I’ll get there somehow.
March 5th, 2009 at 10:42 am
I had just published a tip that has helped me overcome the temptations of lifestyle inflation.
You set your direct deposit, if you have it, to be a flat amount into your primary spending account. That way if you get a raise you don’t see it. The remainder can go into an savings or investment account, preferably one that you don’t have online access to so you can’t use it as easily.
Good article, it is something we all have to be on alert for.
March 5th, 2009 at 10:47 am
J.D.,
To answer a little of your question on finding a balance between the need for savings and the obsession of savings I have discovered a few things about myself this past month. On my site I am trying something I call the “Single Income Experiment.”
I know that many families right now are living this experiment, but my wife and I both teach, neither one of us make more than $35,000 a year and we are trying to live for one month on one of our salaries. As I have been forced to become extremely frugal I realize there are certain things that I enjoy too much to give way to “cheapness”. Each evening when I sit down to read I enjoy a cup of homemade hot chocolate, (tbs of cocoa, tbs of sugar, dash of salt, tsp of vanilla and a cup of whole milk), but over the past few weeks during this experiment I have regressed to instant hot cocoa, just add water! It is terrible and a poor substitute for my nightly indulgence.
I began to think about other areas that I have let my instant cocoa habits creep into. I have decided that as long as my savings and investing goals are being met, and I keep my necessities in check (very much like the balanced money formula) I don’t care as much about if I blow money on things that I enjoy from time to time. There is a balance, but like anything else that is put on a balance the load can shift from time to time and you just need to have enough self-awareness to make the right changes.
March 5th, 2009 at 10:51 am
I overspent in college (big time). Do I regret it? No.
I had to work hard and make sacrifices to get out of debt. However, the experience taught me a lot and changed my life for the better.
March 5th, 2009 at 11:12 am
Great post !! I struggled with lifestyle inflation and that lead me to seek out personal finance books and blogs for a solution. My first job paid $90 per month (I’m in India) back in 1997 but I still had money left over after all my expenses. However, in 2005 I was struggling to pay my bills even though my pay had increased to $1500 per month !! Lifestyle inflation creeps up on you and catches you unaware.
March 5th, 2009 at 11:21 am
Good point that I know many young adults can relate to. SOmetimes experience has to be a teacher because we won’t listen to any other source. Good luck in your mission to help high school students. Are you in schools doing lessons?
March 5th, 2009 at 11:29 am
One thing I noticed as a student was how many people starting out on their own refuse to DEflate their consumption after they move out of their parents’ house. The cost of education has drastically gone up. I went to a state school and got a roommate and didn’t need student loans or credit cards to make it through.
March 5th, 2009 at 11:30 am
This sounds a bit like my story, only without the high salary. The more money I would earn the money I spent. It became a vicious cycle and I ended up spending far more than I was earning. I’m glad that I was able to get my head out of the sand and see what I was doing to myself. I have been working on a turn around and it is taking much longer to get myself out of the hole I dug for myself than it took for me to get in it in the first place.
March 5th, 2009 at 11:55 am
I made the mistake of living off my student loans in college when I could’ve been working. Instead I spent my time hanging out with my friends and playing my playstation 2. Now I’m married, never see those friends, and have to fight with the wife over my playstation time. Not to mention the $17,000 in student loans I accumulated. Wish I’d been smarter back then.
March 5th, 2009 at 11:56 am
Like Holly and EscapeVelocity, I was also a graduate student on little money for a long time, and only got into earning somewhere near six figures in my 40s. That was ok, and I even managed to pay off my student loans and buy a home on a small income. Once the better money kicked in, I put savings (savings account and retirement contributions) on autopilot, and started to spend the rest - on many wishes that had had to wait half a lifetime. Now, with tax rises in my country, and a quite substantive paycut, my take-home pay is substantially reduced, and I am not one bit happy! For example, I will not be able to take a trip with my elderly mother to a place that was important in her childhood, because neither of us has enough money for this. That makes me very sad.
I guess what I am trying to say is, in the current economic situation in many countries around the world, lifestyle deflation can pinch you hard even if you have always been responsible and never been a spendthrift, so the usual reasoning about cause and effect may not always apply.
At the same time, I applaud all efforts to give children and young people a better financial education than what we had, or didn’t have, in our school days.
March 5th, 2009 at 12:10 pm
Most people make finances too complicated. Lifestyle inflation is fine as long as your finances are simple and under control.
If I were starting out again, or teaching a young student, or what I will teach my kids when they get older is this.
There are two simple rules to follow and finances will never be an issue.
1) Never borrow money for anything.
2) Save 50% of what you make. Forever
There you go. Everything else takes care of itself. No budgeting, no bracket creep, no lifestyle inflation issues, no worries.
No exceptions. Not for education, not for a car, not for a house, no exceptions.
example. Graduat HS at 18. Work your way through college. Graduate at 22. Get a job starting at $50K. Live on 25K (taxes - I know) Each year after that, income increases, so savings increases. After 5 years, at age 27, you have enough cash for a home, car, whatever (150K-180K). By age 30 you are financially independent. No debt. likely $100K + in savings.
You don’t have to worry about monthly bills or budgeting. If you get a raise, you get to spend half of it. If you want to buy something, you actually buy it, instead of borrowing for it.
If you follow these two rules, you don’t have to inflate or deflate anything.
March 5th, 2009 at 12:50 pm
Thoughtful post, and true for me.
I remember when my husband and I were grad students, his adviser told him, people always think they need just a little more than they have. At that point we had no car and lived in an upstairs apartment on the bus line. Doing laundry meant schlepping our duffel bags to the laundromat. We used to think, “If we had just another $300, we’d be OK.”
Fast forward to today. We have everything we need and most of what we want. Our house is paid off, our two ancient cars are paid off, we have retirement savings, college savings for our kid, a nice emergency fund and just a tiny amount of consumer debt. But still we think, “Wouldn’t it be nice to have another $3,000.”
March 5th, 2009 at 1:29 pm
It seems to me that a lot of students seem to graduate from school and expect to start out at the same level that their parents managed to achieve after years of working, and they finance that way of living on credit cards if the money is no longer coming from their parents. It doesn’t occur to them that they should, in fact, be “living like students”.
That was never my problem. I grew up without much and spent most of my life poor - although that was exacerbated by living with a partner who expected me to support him in the style of living to which he wished to become accustomed. I left once I realized I really didn’t want to support an able-bodied adult who was interested neither in working for a living nor taking on the household chores.
I had some well-meaning friends who told me that I “deserved better than that” and that it was time for me to have what I wanted. Shopping to fill a large hole in my life (as well as having to replace everything but the cat and my sewing machine), combined with the above litany, proved to be an extremely volatile mixture, because I was, in fact, still poor. I was even POORER, since I was paying much more for my housing. I should have remembered that I was poor. I horrified one friend by saying that I needed to live my life with lowered expectations - but it’s true. I don’t make a lot of money. It is probable that I will continue to not make a lot of money, and that that will not change. Going into debt for the “stuff” I had had to do without all my life didn’t actually make my life any better; in fact, it made it worse, because debt snowballs like nobody’s business, as many of us have discovered.
There are worse things than being poor. Being in debt is worse. I’m living like a pauper until I get my credit card debt paid off this year, because, guess what? I AM a pauper! I have no business living as if I money to frivol away. Taking a look at your economic level and making a realistic assessment of the kind of life you can live is not the most horrible thing that can happen to you. Believing that there are things you “deserve”, and trying to live as if you have money, when you don’t, can lead to a whole lot more unhappiness than the simple realization that you’re poor.
On another note: Travis, you are not the only guy who’s having a difference of opinion with his significant other over playstation time. Can you not negotiate with her so that you both agree that you have X [specific amount] every day on your playstation, and you can negotiate for more time on it in return for performing Y [specific chore]? That is, you get one hour on the clock when you get home from work to just decompress and change over to “Family Travis”, and that if you do something over and above the usual chores that you need to get done, you get an extra half-hour or hour the next day? [Possibly non-sequential, if two straight hours cuts into your usual dinner time.] Maybe negotiate for extra time on the weekend? That way, once you and your wife both understand that you get a specific amount of time every day, and there are agreed-upon ways you can trade off for more playstation time, she won’t be saying “You’re always on that thing!” and you won’t be saying “I never get to use it!”
March 5th, 2009 at 1:36 pm
Graduat HS at 18. Work your way through college. Graduate at 22. Get a job starting at $50K.
And then, wake up and think, ‘My, what a nice dream!’
My friends and I all worked our way through college, but no one could pay tuition and living expenses (at the state school we went to) on what we made. Our choices were take out loans, get help from mom and dad, or go to school part-time, in which case there is no way we would graduate at 22. And no one, no matter what the major, was hired for an $50K job.
The idea of trying to live on 1/2 your income is a good one, I do it myself because I’ve made some huge sacrifices and I’ve been lucky enough not to be hit with any major health/personal issues. But the picture you painted of people who are just starting out is accurate for a handful of people, if that.
March 5th, 2009 at 1:38 pm
Troy… lot’s of new grads are not qualified for jobs that start at $50K… I started at $28K before taxes, living on 50% of that was just barely an option and I have a pretty low cost of living.
Additionally… there are plenty of exceptions. Earning a degree in Engineering in 4 years will not afford you enough free time to pay your way through college. Sure, scholarships, grants, parents kick in a little, but odds are you will need to take out at least a small loan.
If you want to be a teacher you will have to add in a masters degree if you ever want to earn a decent living. Lawyer, doctor, nurse, emt, counselor… all need extra school. Often school that will not allow, or strongly discourages, students to work outside of it.
My boyfriend is currently in law school and he is either in class or studying 80 hours a week. First year law students at his school are not allowed to work outside of it. As in, they will kick you out. He’s lucky, he is in the top 10% of his class and has about 80% of his tuition paid for with scholarships. Of course he wants to practice in an area that won’t make him rich, but it will make him comfortable, and we’ll probably be able to pay off his student loans that help pay living expenses.
I think it’s a good idea Troy, but it will only be feasible for a certain amount of people who are in a field of study that they can enter the work force right after completing a bachelors and work full time during school.
March 5th, 2009 at 2:26 pm
Thanks for this post, Mike. I hadn’t heard a name for the “enough” number before, but I figured mine out some time ago, and it is very helpful to know how much I need and that anything more is gravy. Is this term from one of the books you mentioned?
March 5th, 2009 at 3:25 pm
Yeah, the $50K job right out of college was good for a laugh. My full-time job right out of college paid just over $13K. (That was 1989.) I put myself through grad school with grants and credit cards. Supported a deadbeat boyfriend for 3+ years, then had to replace everything in the apartment when he finally left taking everything with him (trust me - it was worth it).
With a master’s degree, the most I’ve ever made was (gross) about $80K. I voluntarily took almost a 30% pay cut to get away from that job. Lifestyle inflation has kept my anxiety level on simmer, but it is now coming to a stop since I have finally owned up to the need to become a nagging shrew (love that!).
This is one of the topics that absolutely requires looking at relationship dynamics … how many men out there are working 60-80 hours a week to support a demanding wife? On the flip side, how many women out there are working night and day to support a deadbeat guy? Girls, date the artist/musician/writer … but don’t move in with him.
Less personally, how do you fight lifestyle inflation if partners make widely divergent amounts of money, one person puts everything they earn into the “ours” pot, and the other person thinks everything they earn over and above half the bills is “mine”? If one partner’s lifestyle (i.e. list of needs & wants) is constantly inflating, it affects the other partner’s financial stability too. This is, unfortunately, one of those essential relationship factors that usually doesn’t get discussed before a commitment is made. Any tips on peacefully negotiating a new finance-sharing paradigm?
March 5th, 2009 at 4:25 pm
The number in the original post was $50K right out of college.
That is why I used that number.
Regardless, live on half and you will not have money issues.
And it is entirely possible to work and pay your way through school without loans. scholarships, grants, work study, jobs, tutoring, live at home, with relatives, friends, whatever. It can be done.
We have simply become a society that doesn’t want to wait for anything. So we borrow and justify. Cycle never ends.
In college I lived on less than $800 per month including apartment rent, car, insurance, utilities, bills,gas food…everything.
Keep that lifestyle when you graduate with your $30K a year job and it still works.
save for 5 years and off you go.
I am not saying it is easy. I am saying it works
March 5th, 2009 at 4:52 pm
The question of whether lifestyle inflation is bad IF you can afford it, is interesting. My take on it, is that the more money you make, the more you have to lose. If you are making $200K a year, you can easily afford some really nice luxuries, but you are also far more likely to suffer a 90% decrease in income than somebody making $20K a year. The danger of lifestyle inflation is that your income drops, at which point it is a lot harder to cut back.
Myself, I am entering my fourth year of flat spending (as measured by total annual/monthly spending) - not even adjusted for inflation! I target my lifestyle to around the median income level which makes it feel more sustainable. And I do not feel my life is “unfulfilled” by spending less. I am not defined by the amount of stuff I have!
March 5th, 2009 at 5:07 pm
@chacha1
One way to get around the issue of partners making different incomes is to establish an “ours” fund that is based on percentage of the total income that each partner brings in. First you determine how much your combined monthly expenses are. Then you each contribute a percentage that is equal to the percentage of your income that you bring in.
So if you make 100k but your partner makes 50k, that means you contribute 66.6% of the monthly expenses while your partner contributes 33.3%. You can have a joint account for monthly expenses and automatically deposit your contribution every pay period. That can make things more equal so that one person’s income is not eaten up completely while the other person has extra spending money.
March 5th, 2009 at 5:13 pm
This is how I try to balance lifestyle inflation with having a bit more fun with the money I work so hard for…
I use the “All Your Worth” 50-30-20 system for my base budget.
When I get a raise I increase my budget for “wants” or fun money by 30% of that raise (i.e $1,000 a year raise equals $300 in “wants”)
The remaining 70% of the raise ($700) all goes into savings vehicles, either 401(k) or longer term savings accounts.
Now I may eventually want to increase my “needs” with a larger house or maybe I’ll have a little one to care for someday, at which point I can re-tool back to 50-30-20. But until a “qualifying event” (so-to-speak) requires me to do so, I am saving more and preparing for the day that I need to expand my needs (ha).
P.S. Troy… it is worth noting that there is a difference between “things that worked for me” and “things that can definitely work for everyone in every situation if you just try hard enough”. I’m not saying you don’t have a fine point, you do, but not everything works for everyone in every situation.
March 5th, 2009 at 8:25 pm
Thanks for making me think this out.
The big questions for me when evaluating “lifestyle inflation” budget items is the experience factor. My inflationary expenses rarely if ever are related to keeping up with anyone else, they are all about savoring the now.
My kids are smallish, adorable and still love to spend time with their parents. Our family splurges are usually expenses which allow MrP and I to take advantage of that experience, because in 5 years the kids will prefer to be with their friends. There will be no way for me to go back and enjoy being the mother of a 6 year old who thinks I am the most fabulous person in the world, I must do it now.
March 5th, 2009 at 8:57 pm
The ongoing commercial on tv and radio and elsewhere is somehow attract our mind to hungry eyes since the aim of commercial is how to influence the mindset of watchers or viewers, if this commercial we here every day, every moments, every seconds and it will become our habits to hear those commercial, somehow our mindset will change and with the mind share that’s fill up with these stuff, it’s only a matter of time to “click” that mind to buy.The only way is to hold those inner desire to buy, or not to watch or hear commercial…lol.I guess we have to be really discipline and firm, just buy the basic stuff,the rest we have to live in a simple life.Don’t you think living simple is beautiful and stop all those wanting things?Especially during global crisis
March 6th, 2009 at 5:02 am
As someone who’s long-term self employed, I’m pretty used to managing variable income, but if I were drawing a paycheck, I’d use the same approach:
Set a reasonable lifestyle limit — personally, I can get by spending $25,000 / year (post-tax dollars). When you have income beyond this, save 90% of it and spend the other 10% (if the income is highly variable, save the 10% and spend it over time in a more stable fashion) — then your lifestyle will always reflect increases in income, which gives you an immediate incentive to try harder, but you are simultaneously working towards financial independence.
March 6th, 2009 at 5:51 am
Another way to look at it is:
Is there any proof that the new spending and new stuff will actually make you happier? If you were truly poor to begin with, then both common sense and plenty of research on the subject says yes, getting your needs met definitely makes you happier.
But the research shows that more and more ratcheting up of spending and lifestyle does not make people happier. I explain this further here http://www.diamondcutlife.org/the-peak-of-happiness-and-its-causes/
March 6th, 2009 at 6:44 am
Troy @44 - You are right on the money. It isn’t easy but it can be done, both college without debt and living on very little. Your statement, “we have simply become a society that doesn’t want to wait for anything. So we borrow and justify. Cycle never ends,” applies to both situations and sums it up quite well.
Most people think some kind of debt is “good” debt, generally mortgages and student loans, and for some it can work and is sensible. Most people, though, don’t know how to make debt work for them, don’t bother to evaluate whether debt makes sense for their individual situations. Your average 18 year old college bound kid sees “everyone” taking out student loans and just assumes he should too. He doesn’t stop to think about whether he might be better off working for a few years, saving the money, and then attending. I still see financial advisors say that you should *never* pay your mortgage early because of the tax benefits. I say, why is it better to give your money to a bank than to the government? If I pay $10K in interest on my mortgage this year, I get a reduction of $2,500 to my taxes, buy I’m still out a net $7,500. If I pay off my mortgage, I get to keep that $7,500.
Debt is a tool that can be used well for certain things. If you haven’t thought through and done the math to see how it’s the best solution for your individual situation, then you shouldn’t take on the debt.
March 6th, 2009 at 10:05 am
Reading some of these comments, I feel like I come from a different planet! I don’t have a lifestyle inflation problem; I make $19,000 a year and support two adults and a child on it. There’s no buying a better house or car, and definitely no TV or dinners out. I’d welcome any lifestyle inflation that arrives, because to me, an increase in lifestyle would simply mean I could meet all our needs comfortably. Lifestyle inflation to the point of spending on “wants” is a distant mirage. But, we’re happy, and even though not every bill is paid on time, our little girl is healthy and intelligent. I’ll keep striving to find a better job, more income from this corner or that chance, so that I can improve our lives a bit. But I’ve long ago learned the lesson to be happy with what you have and re-use, penny-pinch and cut back.
March 6th, 2009 at 1:50 pm
(Not that anyone’s going to read this comment way down here, but …) I think like most of the hard decisions in financial matters, the difference between “bad” and “good” versions of what could be called lifestyle inflation are intent and awareness.
In fact, I think there should be a distinction made between lifestyle *inflation* (unintentional, often not really fulfilling your needs), and lifestyle *improvement* (an intentional, educated change in response to improved financial situation).
The trap is not paying attention or keeping track of what you’re doing when your spending increases with your income. But if you’ve been really wanting/needing something, and have gone through the numbers and figure out that now you can afford it where you couldn’t before, and do it with the intention that it will improve your life - why not?
March 7th, 2009 at 1:35 am
My personal and perhaps rather crude method to beating lifestyle inflation has been to save the vast bulk of whatever extra money I’ve earned.
I’ve probably overdone it (and it doesn’t feel so clever now those savings have been hit by the bear market) but at least it means that even on a lower, recessionary income, I don’t really feel any different.
March 7th, 2009 at 3:13 pm
Although sometimes we give in to lifestyle inflation I think my husband and I manage it pretty well. I finished studying this last year so for the past few years we have loved on hubby’s income. We always saved $500 each paycheck. Anytime I brought in some extra cash we would save most and buy ourselves a little treat with some of it. This year we have an extra $52k from my graduate job. We save every penny of it. We have inflated our lifestyle a little, we have done this by changing our savings goals from 100 percent house deposit ( we already have a $10k emergency fund) to my pay going towards a house deposit and the $500 of hubby’s pay we used to save now goes towards saving for a holiday at the end of the year.our inflation is making a short term savings goal.
March 8th, 2009 at 7:12 am
I think this article is excellent. This individual, as many of us, have realized that “lifestyle inflation” must be recognized and we must live within our means.
The sad thing about it is that our government is throwing dollar after dollar to big banks in an effort to have them “loosen” the credit market (read this as extend more credit - mortgages, credit cards, car loans, etc.) to the public, thus enabling the public to re-gain the ability to live beyond their means.
March 11th, 2009 at 10:56 am
Hi J.D.
I have a question about this post. I understand the concept about lifestyle inflation, but I was wondering if you had any ideas about specific ways to prevent it. For example, both my husband and myself are finishing college right now. Fortunately we don’t have any debt, even student debt. However, our necessary expenses and income will both definitely increase in the future as we look to buy a house and have a child. I know an important financial principle is buying a quality product the first time even if it is somewhat more expensive because it will last you in the long hall. My question is, how do you know when spending starts to become lifestyle inflation versus just paying for quality versions of necessary items that you’ll need in the future? Any ideas?
March 12th, 2009 at 2:43 pm
I would like to thank many of you for the comments about my post.
If any of you would like to learn more about our program or contact me directly you may do so at mike@thesecurestudent.com or http://www.thesecurestudent.com