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.

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Mike
Mike
13 years ago

I like the one about learning to live on one income. Because of kids, we are living on 1 1/2 and would love to get down to that magic 1 income point. You are smart to be working towards it while still collecting two full paychecks.

Scott Simmons
Scott Simmons
13 years ago

I think the best thing that ever happened to me & my wife, financially speaking, was her getting laid off & remaining unemployed for about eight months. We learned to live on just my income; although we racked up a bit of debt during that time, we learned to live at that income level. In the last year that she’s been working again, we’ve racked up about $12,000 in savings while increasing our retirement investment rate by over 200%.

Bellen
Bellen
13 years ago

Great post! Had friends that before kids used her income as ‘pocket money’ – and then they just could not understand why they were having extreme difficulty making end meet after that first child – while trying to life the same lifestyle.

MillionDollarJourney.com
MillionDollarJourney.com
13 years ago

Well written post! We have similar saving philosophies, I look forward to following your blog.

FT
http://www.MillionDollarJourney.com

Kevin M
Kevin M
13 years ago

Haircut Cash has been one of the easiest ways for us to save money. Supplies cost at most $30-40, and you break even in 2-3 haircuts.

Wesley
Wesley
13 years ago

I agree on the haircutting idea. I was wasting around $20 every two weeks or so. I’m cutting it myself now, and saving a good bit …both money and aggrivation at bad cuts.

On another note, my wife and I have similar thoughts on the situation the author described. Having two incomes but paying all bills with only one has really helped us along financially.

Matt
Matt
13 years ago

Anyone remember that old Seinfeld riff about a car company coming out with a new space instead of a new car? We should think of investments that way, as though they amounted to buying yourself an extra day in the week. It’s easier to put investing first when you think you’re buying independence that way.

J.D.
J.D.
13 years ago

Nice, Matt. I like that line of thought. Financial Independence is an important concept. I need to spend some time writing about it to drive it home.

Angie
Angie
13 years ago

I’ve been thinking about this entry since yesterday. In general I think it’s right on track. What I keep thinking about is that bit about the affordable housing, and the implication that the author will be (but isn’t yet!) living in an expensive area. I have no idea what his income is, nor where geographically he wants to end up, but he may find that it’s pretty hard to put this into practice when the time comes. I live in Seattle, which has had astronomical rises in real estate costs in the last decade (and no sign of a popping… Read more »

Tim Z
Tim Z
9 years ago
Reply to  Angie

well put. I would also add maintenance costs to your list of expenses; these are significant and not just incidentals. As a general range I would estimate 1%-3% of the purchase price each year… to get any more specific, you really have to know the house and its condition. Our maintenance budget is $1000/month. It’s possible this is a little overkill and we’ll only ultimately need $800. It’s a 100-year-old house, in “good” shape but things just wear out over time. The house question is a big one, especially in expensive areas… expensive whether you rent or buy. I’m writing… Read more »

Jonathan
Jonathan
13 years ago

J.D. – Thanks for letting me guest write!

Thanks everyone for the comments!

Angie – I want to live on the West Coast, and I totally know what you mean. We are lucky in that we are both professionals in an area with a good income potential.

Housing will definitely be our greatest hurdle, and are working hard on that 20% down payment every month 🙂

moneymonk
moneymonk
13 years ago

Living on one income!! That is possible depending on where you live.

I grew up in a household in which my father worked and mu mother stayed home.

My Dad was able to pay all the bills and groceries. Home paid off and retire comfortable. Of couse they never had a credit card. (that helps alot)

I thought before it was crazy to live on one salary but as you said it forces you to deal with less money.

You both can do that now. Live off one paycheck and invest/save the other.

Cazi
Cazi
13 years ago

“Even if we become millionaires someday, she’ll still cut my hair.”…with the finest scissors money can buy. haha j/k

Angie
Angie
13 years ago

Jonathan, I’m glad to hear that your glasses aren’t as rose-colored as I thought. 😉 Even after unloading all that above, I still kept thinking about the issue–about how those numbers relate to “lifestyle inflation”. Say your family is in the second situation I sketched out above, clearing 90K after taxes. That means you’re surely grossing over $100K. The $400K median house price generally describes “median” houses: 2 or 3 bedrooms, small city lots, decent but not superb local schools. It’s a few steps up from the student lifestyle, so in that sense it reflects some “lifestyle inflation”. (Would you… Read more »

Jonathan
Jonathan
13 years ago

It is tough, but I have hope due to two things: 1) If you are geographically stable – If you get a 30-yr fixed mortgage, your mortgage payment will be the same for the next 30 years. Inflation will kick in, you salaries should rise, and soon that mortgage payment will be a much smaller piece of your income. So many people in those $400,000 houses are paying $500 a month for housing because they have an old mortgage. The key is not to upgrade to a bigger house and bigger mortgage later on! 2) If you aren’t, renting in… Read more »

Angie
Angie
13 years ago

I agree with you, to a point. The first idea is absolutely true. Maybe I’m mistakenly assuming that you’re a first-time homebuyer. The barrier for entry to first-time homebuyers is just about insurmountable to all but the most affluent. Is it nobler in the mind–or better for the net worth–to continue to save for a down payment til you hit the magic 20% mark, or is it better to put less down in hopes of getting on the home-price escalator as soon as possible? Remember that the numbers I cited above mean that a family has to gross more than… Read more »

fin_indie
fin_indie
13 years ago

I’ll make what is probably a controversial comment on a post about inflation: In a city like Seattle where the median house is $400k+, and you’re trying to buy your FIRST home, you MUST make compromises. No one should expect their first real estate purchase to be a $400-$500k+ house, especially if you cannot afford the payments. Condos, town homes and continuing to rent are all good options until you can afford to “trade up” to a house in the median value range. (yep, that was the controversial comment). Trading up is how many people go from meager homes to… Read more »

Angie
Angie
13 years ago

Excellent post, Fin_indie. My husband and I are on our second fixer-upper, so I know exactly where you’re coming from. (The four of us are now living in a princely 770 square feet, having rented out the lower floor of our house for the time being. This is relatively luxurious compared to our last place, at 690 sf. Hey, what can we say, the new backyard is also way bigger and is fenced in…and we kept our first house as a rental…) That said, I took a peek at your blog, and it looks like you don’t have kids? Most… Read more »

The Tim
The Tim
13 years ago

Angie, Great posts. I totally agree that it’s nearly impossible to find an “affordable” home to buy around here (Seattle). Jonathan’s point about being “geographically stable” is a good one, but of course it is in direct conflict with fin_indie’s comment about making compromises and then “trading up.” What it seems to boil down to is that unless some air comes out of this housing bubble, I’ll be moving away from Seattle if I want to buy a house… even on my above-average income. (P.S. – Click my name above for a link to my blog where we discuss this… Read more »

WS
WS
13 years ago

Angie – to me it sounds like there’s a whole lot of people living in Seattle who can’t afford to live in Seattle. They have made compromises to live there. Jonathon is simple giving a lesson in being financially prudent.

We all choose where we live and what we do for work and the compromises we make along the way have to be paid for eventually.

-Wes

tolak
tolak
13 years ago

Does Seattle have an intrinsic worth that’s independent from the professionals who are attracted to it and creating its wealth?

If not, then the choice of location and occupation is reasonably tied to housing prospects, and is not frivolous as Wes implies.

fin_indie
fin_indie
13 years ago

It’s not that people cannot afford to live in Seattle, per se, but it is true that salaries have not risen accordingly, as real estate prices have increased over the past 8-10 years. Seattle is not unlike other west coast cities in this regard (SF, LA, etc). Quite simply, it just costs more to live in the city. Wes makes a good point: we all make choices on where to live and work, and it is a pretty good lesson on how to get ahead. You’ll never get ahead if you buy too much house and are drowning in a… Read more »

JMG
JMG
13 years ago

If you really want to get rich slowly, then you must go to the library and get “How to Live Well Without Owning A Car”–outstanding book that attacks the biggest factor in keeping people from reaching their financial goals.

Read this book before you buy or rent any place to live, and if you’re already housed, read this book to decide if you should move.

spongebub
spongebub
13 years ago

living on one income can also mean living one one income + savings + accumulating minor debt too. This could be a more pleasant trade off to the double stress of two working parents with young children. Since I’ve been working now and missing my daughter, I’ve been thinking about the possiblity of running into a deficit every month instead, for the next 2 years say (until she is in school). I would roughly project running shy @ about $10K a year. I have substantial retirement savings, however, no car loans. We only have a mortgage payment and regular bills.… Read more »

JohnK
JohnK
13 years ago

Another excellent article, JD!!! Other ways to help trim some costs include insurance. Constantly shop not just for car, but homeowners/renters and any other policies that you might need. For auto, I had used Progressive for awhile and thought I was paying an okay price. I kept hearing the Geico commercials about saving 15% and tried them….I didn’t save 15%….I saved closer to about 40%!!! I was paying Progressive all that extra without even knowing it because I didn’t shop around. House Insurance policies also vary greatly and you could be paying more than you should. Finally, compare bundled and… Read more »

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