Have you seen those birthday cards that show how much a gallon of milk, a loaf of bread, and a gallon of gas cost back in various years? The usual reaction is “wow, I can’t believe how cheap things were back then!”
Except they weren’t cheap. They only seem that way in retrospect.
Inflation is (usually) a gradual increase in prices over time — and it’s a good idea to know how to prepare for inflation — but there’s another kind of increase over time that can be just as insidious: lifestyle inflation.
Pretend that your life is one of those birthday cards with the years on them. What would your spending look like back when you were just starting out?
Mine would look pretty basic. It’d say things like rent, car payment, car insurance, gas, parking, electricity, phone, groceries, laundry, credit card payments, student health insurance, plus a tiny bit of spending money (enough for one fast-food sandwich out per week.)
Flash forward to now though, and things look pretty different. I have things like a house payment, homeowner’s insurance, car insurance, life insurance, flood insurance, disability insurance, vacations, an iPhone, eating out a LOT, ongoing vet bills (our cat is still sick), things for my son, clothes, massages, gifts, charity, etc on my card.
If you’ve been established for any length of time, chances are you spend a lot more money now on things you couldn’t have afforded at all (or very much) back in the beginning. You have some luxuries, and maybe some higher priced items that are similar to what you had before, but nicer.
That’s lifestyle inflation: the tendency to increase your lifestyle as your means increase.
And that’s fine. We don’t have to live our lives in desperately-watch-every-single-penny-all-the-time mode once we’re making a little bit more money and/or have our finances under control.
But we DO have to be careful to combat lifestyle inflation so that we can win. It’s easy to tell yourself, “now that I’m making X, I can afford to do Y”. But what are the costs of doing so?
Avoid doing things like buying a bigger house or a more expensive car just because you can. Be sure that you’re first spending additional money to shore up your financial foundations. If you want to win and get ahead financially, you’ve got to keep lifestyle inflation in check.
Not going overboard is the key.
Posted in Money Management on 12.11.09 with 7 comments.
Good reminders – this is a great time of year to look at your spending item by item and decide whether it’s worth it. Lifestyle inflation can happen gradually and it’s sometimes hard to pick up unless you take a hard look at the numbers.
I agree with you though. If you’re saving enough and you can afford some perks, go for it!
When I read this post, the phrase that came to my mind is that saying (I don’t remember exactly how it goes) that basically says that our spending increases proportionally to our increase in income.
I couldn’t disagree more. What I would agree with for people that experience this is that one’s level of discipline decreases proprotionally to an increase in income.
I have had my share of income increases over the years, and I have always made sure that I never went out and spent money just because I had more of it.
I certainly enjoyed some things with my increase in income, but one still needs to remain disciplined with their spending, no matter the income level (unless you hit the lottery or something).
Continually ask your self the question “Do I really need it?” whenever making purchasing decisions and this should solve the issue.
Great post
Dear Jackie:
This is great! This exactly where most people fail. They feel that they have to get more just because they can! That is the biggest mistake I think people can make.
Increasing spending as your income increases will cause you to be stuck with unwanted bills in the recessionary times. The big ones you have mentioned are buying a bigger house or a nicer car. Those purchases tie you with payments for decades and most people do not realize that.
There is nothing wrong to treating yourself to a nice vacation or something that is not going to make you obligated to somebody else for years to come. My rule is: “Treat yourself to an experience not another thing” Experience stay with you and you can learn from them. Things, unless they are useful tool, usualy make you feel good for a bit and then become useless.
Knowing your priorities and what you really want in life can help you make those decisions.
Best of luck!
Tomas
I am going to have to give myself a little bit of a pat on the back here… I’ve been “on my own” for 7 years, own a home, have an active social life and hobbies, and my monthly spend is only $600 more now than it was when I was a college student just barely getting by. I’m pretty happy with that!!
The real trick though, is I don’t at all feel deprived. Being happy with what you have is the key, as well as having a future goal.
2 Cents, that’s a good point. It’s helpful to review your spending regularly like that on a line-by-line basis.
David, I’d never thought of it like that, but I bet you’re right that “one’s level of discipline decreases proportionally to an increase in income”. It’s easier to not be disciplined when you feel like you have more money (but it’s important to stay disciplined anyway).
Tomas, yeah I suspect that not many people think about their income being tied up for decades when they make large purchases. Instead, they figure they can “afford the payments”.
Nicole, very impressive! And being happy with what you have is what it’s all about
I’m so happy I found your blog – smart financial advice for sure! I agree with the lifestyle inflation idea. While it pains me sometimes when I walk in a friend’s home that is gorgeous and huge, I remind myself that I don’t need it to be happy. Having a mortgage payment that we can afford plus having the freedom to do other things with our money rather than sinking into payments for things we don’t own yet is hugely gratifying. We’re working on changing our attitudes day by day. Articles like this reinforce that. Thanks for the food for thought.
Best,
Amy
http://housewifehacks.com
Amy, thanks a bunch
And I agree, the freedom to do the things you want to do is hugely gratifying.