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:
- Put saving first. You've heard it before, but that's because it's works. Pay yourself first. If you get a raise, immediately increase the percentage going into your 401k, IRA, or savings account. The less that's ending up in your checking account, the less you'll have the urge to spend.
- Put debt last. Making more does not mean you can borrow more, contrary to what the credit card companies or other lenders may suggest. Even though I now have credit lines nearing $20,000 on a single card (which is totally crazy to me), I would never consider using that money to buy any depreciating asset.
- Living on one income. Our goal has always been to be able to both work half-time in order to have more time to raise our future children. If this can't happen, then one of us will work while the other stays home. Right now, we are trying to do this even though both of us are currently working. Doing this will force us to deal with less money and place more importance on the other things in life.
- Buy an affordable house. For most people their largest monthly expense is housing. Affordable does not mean what the bank will let you borrow! By simply buying the biggest house possible, you're also inflating many other things. You have to furnish all those extra bedrooms, heat them every winter, cool them every summer, and insure them. Sure, it will appreciate more, but that money could be put towards other investments. As we plan to live in a very expensive area, this rule will probably be the hardest for us not to break, especially with our one-income rule.
- Be realistic about cars. Probably the second largest monthly expense for many. I personally love cars — they were part of the reason I became an engineer. But I also know that a new luxury car means more than just higher monthly payments. It means more expensive insurance, maintenance costs, and repairs. It also likely has a bigger engine, which means less fuel economy, and may even require premium-grade fuel. We have never even owned a new car before.
Basically, we are trying to define a comfortable, simple lifestyle that focuses on what is really important to us. We realize that our standard of living is already greater than 99% of the world. Anything we buy or purchase should be in response to an actual need or something we really value, not simply because “we can afford it”. The things that we buy on a $75,000 salary shouldn't be much different than if we had a $750,000 salary. For example, my wife cuts my hair because I like having a simple haircut, it's not difficult, and she does it how I like it. Even if we become millionaires someday, she'll still cut my hair.