The Ongoing Battle with Lifestyle Inflation

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.

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Chett
Chett
11 years ago

It sounds like you and I have traveled similar paths. Congratulations on your arrival and I applaud your efforts with students.

Miranda
Miranda
11 years ago

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.

Betsy
Betsy
11 years ago

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… Read more »

Michele
Michele
11 years ago

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.

J.D.
J.D.
11 years ago

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… Read more »

Andrea
Andrea
11 years ago

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.… Read more »

Camille@TheFinancialWoman.com
11 years ago

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… Read more »

ThatGuy
ThatGuy
11 years ago

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… Read more »

Ben
Ben
11 years ago

Good post. Relevant in today’s economy and something I struggle with, but am getting under control.

Neal Frankle
Neal Frankle
11 years ago

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.

Ari Lestariono
Ari Lestariono
11 years ago

Amazing lifestyle if you can handle the temptation not to be extravaganza, while still difficult if you are already in habit.

EscapeVelocity
EscapeVelocity
11 years ago

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… Read more »

HollyP
HollyP
11 years ago

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… Read more »

J.D.
J.D.
11 years ago

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… Read more »

John
John
11 years ago

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!

Kevin
Kevin
11 years ago

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… Read more »

Linear Girl
Linear Girl
11 years ago

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… Read more »

Bajan Queen
Bajan Queen
11 years ago

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.

Hogan
Hogan
11 years ago

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… Read more »

Jenzer
Jenzer
11 years ago

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.

Brandi
Brandi
11 years ago

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… Read more »

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

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… Read more »

John Steed
John Steed
11 years ago

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,… Read more »

E
E
11 years ago

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.… Read more »

Tyler Karaszewski
Tyler Karaszewski
11 years ago

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,… Read more »

Tyler Karaszewski
Tyler Karaszewski
11 years ago

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.

Francis
Francis
11 years ago

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.

Jason
Jason
11 years ago

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.

Chett
Chett
11 years ago

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… Read more »

AmericanCliche
AmericanCliche
11 years ago

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.

Prasanth
Prasanth
11 years ago

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.

ken
ken
11 years ago

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?

Shara
Shara
11 years ago

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.

Steven@hundredgoals.com
11 years ago

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.

Travis
Travis
11 years ago

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.

goldsmith
goldsmith
11 years ago

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… Read more »

Troy
Troy
11 years ago

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… Read more »

friend
friend
11 years ago

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… Read more »

La BellaDonna
La BellaDonna
11 years ago

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… Read more »

Jem
Jem
11 years ago

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… Read more »

PDXgirl
PDXgirl
11 years ago

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… Read more »

David Safar
David Safar
11 years ago

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?

chacha1
chacha1
11 years ago

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… Read more »

Troy
Troy
11 years ago

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… Read more »

Frugal Bachelor
Frugal Bachelor
11 years ago

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… Read more »

CW
CW
11 years ago

@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… Read more »

PDXgirl
PDXgirl
11 years ago

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… Read more »

HollyP
HollyP
11 years ago

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… Read more »

Ari Lestariono
Ari Lestariono
11 years ago

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… Read more »

Brian
Brian
11 years ago

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… Read more »

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