How To Protect Yourself From Lifestyle Inflation

Jonathan at My Money Blog has been writing about personal finance for two years now. Here's some excellent advice on the standard-of-living trap.

One thing I worry about is lifestyle inflation. No matter how little or how much someone earns, their spending tends to match their income. When you're living the student life, your friends are also broke, and it's easy to eat frozen pizza for dinner and manage without a car. That was probably one of the funnest periods in your life! But when you have more money, you start looking to upgrade: a nicer car, a bigger house, brand name clothes, cooler gadgets. Call it peer pressure, entitlement, or simply money burning a hole in your pocket.

As we progress along our career paths, here are a couple of things that my wife and I are trying to do in order to try and inflation-proof our spending:

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You, Inc.: How to be the CFO of your own life

In the very early days of 2002, I realized I needed to change a few things about my life.

My girlfriend and I returned from a vacation in Phoenix, Sedona, and the Grand Canyon in the middle of December 2001, having had an excellent time despite some nervousness about flying so soon after 9/11. Upon returning, four things happened to me that forced me to change my outlook. I suppose the older, more rational me can look back and say on some level I caused them to happen.

  1. My girlfriend left me.
  2. I lost my low-paying non-profit job in the arts — a job for which I had just moved to a horrible apartment in northern New Jersey.
  3. My car was impounded by police. Unbeknownst to me, I had been driving with a suspended license due to my failure to pay a years-old speeding ticket I don't remember receiving.
  4. My landlady somehow got the impression that I was moving out at the end of December (although no such decision was ever communicated). While I was out one night, she removed my belongings from the apartment so someone else could move in.

I moved in with my father so I could take some time to look for a new job and to contemplate my existence for just a couple of months. It was during this time I realized that I was losing money every month while working at that non-profit. It cost me more to travel to the job and pay rent and other necessary expenses than I was earning. I decided to start focusing on my financial situation (among other things). Continue reading...

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Basic tips on tipping: How much and to whom?

Waffle House CoffeeEvery time I get my hair cut, I'm faced with a dilemma — should I tip the barber or not? I usually get my hair cut in a small-town shop. I tip $2 on a $12 haircut. If I get to hear stories about Vietnam or histrionic political rants, I tip $3, even if I don't agree with the barber's viewpoints. (I tip because I've been entertained.) Sometimes, if I don't have enough cash, I don't leave a anything at all. Are these tips appropriate?

What about when I pick up Chinese takeout? Should I have tipped the guys who delivered our new gas range last fall? What about a hotel bellhop? A parking valet? Out of curiosity, I did some research on tipping practices in the United States. There's actually significant disagreement about how much to tip for even common services.

For example, you know you should tip your waitress. But how much should you leave? Some people claim that 10% is adequate. Others claim that 20% is standard. But I suspect that most of us learned to tip 15%, and to give more for exceptional service. (The wikipedia entry on tipping currently contains the bizarre claim that "18% is generally accepted as a standard tip for good service".) Which amount is correct? Continue reading...

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Track every penny you spend

I struggled with debt for years. I couldn't get a handle on where my money went. I made a decent wage, but I was always broke! Where did I spend it all? Then I read Your Money or Your Life and heeded the book's advice to "keep track of every cent that comes into or goes out of your life". The results were startling.

What does it mean to keep track of every penny you earn? Your Money or Your Life recommends that you keep a Daily Money Log. This log can take any form.

  • a pocket-sized memo book
  • an index card (or the hipster PDA)
  • an actual PDA
  • an appointment book
  • a computer text file
  • a checkbook register
  • personal finance software
  • a spreadsheet

The most important thing is to use the log. Every time you get money -- whether it's from a paycheck or a garage sale or picking up change from the ground -- write it down. Every time you spend money — whether it's paying bills or buying coffee or paying bus fare — write it down. Keep track of every penny that enters or leaves your life.

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Want to Save? Give up the Big Things!

My wife — the NPR addict — pointed me to a Marketplace commentary by
Amelia Tyagi. Tyagi says not to focus on small expenses, but to focus on big expenses. You can listen to the piece in RealAudio format from the NPR web site, or read this transcript:

Clip those coupons. Shift to that cheap, scratchy toilet paper. And whatever you do, don't buy any more lattes at Starbucks.

You've heard it before. Some famous financial advisor, shaking his finger and telling you how all you have to do is save $5 a week and all your financial problems will disappear. Before you know it, you will be debt free, investment rich, and lighting cigars with Donald Trump.

Yeah, right. The bottom line is, the little stuff really doesn't add up. Unless you live to be 500 years old, saving five bucks a week is not going to pay for a retirement home in Tahiti.

The real advice is that the big things add up. The fact is, one-third of Americans live in a house they can't really afford. Even more of us drive a car we can't afford. Fifty percent of us aren't saving a single dollar for retirement, let alone the 10% of our salaries that most experts recommend. So clipping a few coupons isn't going to build that nest egg.

If cutting the lattes isn't going to fund a comfy retirement, why do we hear that old advice so much? Because it is easy. It is easier to pack a brown bag lunch than to sell your car. It is easier to give your husband a haircut at home than to move to a smaller apartment. And it is easier to boil your own beans than to sell your house.

But of course, just because it's easy, doesn't mean it's right.

So the next time some expert shakes a finger at you for enjoying a lunch at an upscale restaurant, go ahead and roll your eyes.

Just try not to roll your eyes when it's time to make the real money decisions.

Tyagi's advice on big expenses is great. Some people spend so much time sweating the small stuff that they miss the big stuff. They're penny wise and pound foolish, negating their daily scrimping and saving through stupid financial choices that burden them for years. (My wife told me yesterday of a co-worker who wants to sell his Ford Expedition, which he bought new last summer. The problem? He owes $43,000 on it but can only get $23,000 in trade-in. Ouch.)

But I don't like Tyagi's advice on the little stuff.

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Handy personal finance spreadsheets

Good personal finance spreadsheets are hard to find on the web because sploggers monopolize the search results. Still, I've managed to collect links to a stack of them that I'd like to share.

Spreadsheets more useful than web-based calculators because:

  • You can modify the fields and formats to meet your own needs,
  • You can create "what-if" scenarios by making copies of a sheet, and
  • You can save the data for later use.

The following links are all real sites from real people with real useful information to share.

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Your money or your life review

Every year I try to review the steps in Your Money or Your Life to see how we're doing. It's been about two years since my last review, but much to my delight, I found we are following most of the steps well, and I just needed to update some numbers.

Step 1: Making Peace With The Past

A: Determine your total lifetime earnings
The book was written before the Social Security Administration started sending out statements. If you have earned income all your life through regular jobs, this is extremely handy. I needed the numbers from my last review in 2004, Social Security statements, and our last tax return. The combined number for me and the Spousal Unit: $865,872.

B: Determine your net worth
So what do we have to show for all that moolah? Often, this is a depressing part of the assessment. Until recently, I came up in the negative, which is fairly common. For the last review, my net worth was a whopping $2,869. So. Add up assets: I include anything in the house that I could sell for cash, all bank accounts, current market value on the house, investments, etc. $316,183. Now for liabilities: the balance on the house, any other loans or credit card balances, and a tax debt from being a goob last year: $231,690. Net worth: $84,473. Hey! That's not entirely bad. I can tell you this: most of that increase is because we stopped throwing money away on rent and bought a house.

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