Most of this post was originally published last year when I was a guest writer at the Get Rich Slowly blog. I have since made some revisions and added some more material below.
One common thread through my How much house should I buy? post is that whatever size house you get, you’ll expand to fill it up. This reminded me a lot about what I call “lifestyle inflation” – the phenomenon where no matter how little or how much someone earns, their spending tends to match their income.
When you were a student, your friends were also broke, and it was 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. Why? 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 keep our lifestyles in check:
- 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 brokerage account. The less that?s ending up in your bank account, the less you?ll have the urge to spend.
- Put debt last. Making more does not mean you should borrow more, contrary to what the credit card companies or other lenders may suggest. If you have debt, pay it down. If you don’t, keep it that way.
- Living on one income. Our dream 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. This is a conscious decision to actually make less money, in order to focus on the more important things in our life. Of course, we’ll have to work double-hard now in order to make our hourly income high enough to pull it off!
In the meantime, even though both of us are currently working, we are still trying to live as if we only had one income. Over the last 12 months, we saved 43% of our after-tax income.
- 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. As we plan to live in a very expensive area, this rule will probably be the hardest for us not to break, especially on one income.
- Be realistic about cars. Probably the second largest monthly expense for many, I am always amazed when people’s car payments are more than half of their housing payments!! But I also know that a new luxury car means more than just higher monthly payments. It means higher insurance premiums, maintenance costs, and repair costs. It also likely has a bigger engine, which means less fuel economy, and may even require premium-grade fuel. Neither of us have ever owned a new car before, which helps keep our expectations low.
It may seem contradictory that we are moving to an area where the median home price is over $600,000, but that choice is predominantly due to a desire to live near family. In the end, we are trying to define a comfortable, simple lifestyle that focuses on what is really important to us. (Of course, we will won’t lead completely spartan lives…) 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, I think she?ll still cut my hair. I’ll let you know when we get there 😉