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
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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/
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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.
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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.
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(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?
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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.
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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.
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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.
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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?
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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
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Definitely – we moved to a more expensive place, got pay TV and smartphones in the past two years. As a result, we’re trying to slim down our food costs. I’ve always spent very little on clothes beauty etc, and am keeping that up too.
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