Trying To Avoid Lifestyle Inflation

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 ;)

Comments

  1. Jonathan,

    Do you or any of your readers know anything about getting free airline miles or freebies when applying for a mortgage loan thru some link/lender? I am looking at applying for a loan and i remember many moons ago seeing something like this.

    By the way, when someone takes a loan, what are all the fees involved? and what is considered reasonable?
    I see the Ditech ad on TV saying something like $495 fee etc…Why do they charge all these when they are gonna make money from u anyhow?

  2. I had a lot of fun as a student on a small income. But I also remember the frustrations that come with having no money. I remember living in close proximity to other people who made way too much noise.

    My first apartment was above an apartment with a defective ceiling fan that filled my living space with low frequency motor noise. My landlord had the fan worked on but ultimately I had to live with it, and I hated it.

    My second apartment had inadequate heat and was 2 doors down from a drug dealer. Everyone knew it, including the cops, but it takes time to get the evidence for a prosecution.

    My third apartment was a block away from a house that ran their stereo so loud that it was trouble for us a block away. It was always too hot upstairs and too cold downstairs. It was the favorite of my apartments, even though the bathroom leaked into the kitchen and it was infested with termites.

    I would not trade my house to go back to any of those situations. At least here the drug dealers were .75 mi from us.

  3. “The things that we buy on a $75,000 salary shouldn?t be much different than if we had a $750,000 salary.”

    Riiiiiiiiiiiiiiiiiiight. :)

  4. Hi, I am finally moving in with my boyfriend in Boston. Both of us are fairly new in our careers and our combined income will be 95K per year(before taxes, mind you!). We have a combined savings of $10,000 and no credit card debt.

    Anywhoo, I dont have a car and his car is nearly paid off($500 left), but he now wants to buy a $15000 car–(tells me–”just so you can commute”–my commute is 45 mins away). I dont think I need a $15000 car for my commute, but he believes that I am putting down his “i want a good car’ dream!

    I just think that it is too early in our career for us to spend $15000 in a CAR!! Seriously!! I would like something closer to 7-10K on a car if that! Dont know how to make him see the “LIGHT”!! Am I right/wrong?? Any advices helpful…i feel this is putting a LOT of strain on our relationship…his money management skills are waay off the mark.

  5. Judy Mosel says:

    Its hard spending wisely with all of the great deals out there on the Internet. I recently started doing my internet spending budgeting with PaidByCash. You basically go to the Safeway and pay cash…then you get a virtual MasterCard for that amount…which you can spend online. I put $200 on the card and that’s all i spend for the next 6 months online!

  6. I agree with you but a bit of lifestyle inflation does take place and I can attribute that mainly to the time vs money equation. As your income grows, you also take on additional responsibilities at work and at home, which makes you want to outsource things that you would have done on your own like a hair cut ( ps I used to cut both my and my wife’s hair for the past 5 yrs not anymore) lawn mowing, getting the house deep cleaned once in 2-3 months to spend more time doing things that you like.
    One should realise that money has to be used as a strategic weapon to achieve one’s goals.

  7. anthony says:

    This is a great thought and positive action. It is so true that everyone spends almost everything they make and in many cases more. I personally follow this practice and it makes a BIG difference. I spend and have spent such a small amt of my income, that I have no debt.
    Keep up this blog it is great.

  8. Don – a certain degree of lifestyle inflation is certainly expected. I would definitely spend more on a $75,000 income vs. a $20,000 income :)

    dpjax – Maybe not exactly, but you’d be surprised. I know business owners who do earn about $500,000 a year and you wouldn’t even know it by looking at their lifestyle.

    In both of these, I think housing is just a huge variable, at least for us. It boggles the mind sometimes.

    Zoya – $15,000 would be okay with me if he is alright with driving it for the next 10-15 years. I guess you just have to talk about your priorities as a couple – $7,000 saved now could be put towards something else more important?

    syder – I’m with you on the outsourcing of certain things. I outsource cooking all the time :D

  9. Some very interesting comments and I see everyone is very committed to saving…but I wonder for what? What are you saving for, why do you want to earn more money? I am not being facetious; I really want to know the reason behind your efforts.

    One of the seven habits: Begin with the end in mind. I see the blogger has a goal of a million dollar net worth…same question…why? What will having that net worth accomplish? And what are you measuring? And what is the nature of the net worth you are after, specifically?

    I mean, do you want a million in equity (say, in real estate) or a million in the bank earning 5%? Two totally different scenarios.

    Many people fixate on some number but it is often like leaning the ladder of success against the wrong wall. My clients come to me with that same idea sometimes; that is, to grow their net worth to some magic number as if it will resolve their financial issues somehow.

    Look, as a goal I guess a million is as good as any but, really, if you are saving just to reach a number…what is the life you want? What would an ideal day look like, feel like?

    Money is a tool…but for what? To build the life you want, IMO. So isn’t that the real goal? What is the life you want and, now, break that up into pieces and cost those pieces out:

    The house I want: $x
    The car I want: $x
    Number of kids: $x

    So on and so forth. Then you add that all up and you will have a bottom line and that is your real goal.

    I wanted a small but comfortable home in a safe neighborhood and a five year old car that I would keep for five years and then sell and start over. Cost for that: $1,000 a month where I live. Plus expenses: Another $1000 a month.

    My savings earn me $15,000 a year ($300K at 5%) and the rest I earn working three days a week doing what I really enjoy doing and what I would do for free if I could afford to do so. And I also manage to save some of what I earn so my savings are growing, as well.

    I am married and we have a daughter and we look for all the world like a typical middle-class family. But we pay for it all with 24 hours of work a week; meanwhile both spouses work in all the other houses on the block.

    We are not better or smarter, we were just able to decide what we wanted, price it out, and fund it with just enough work to get the REAL job accomplished (the life we wanted). Four day weekends are great!

    Good luck!

  10. I paid about $15000 for the first car I had after my first real job, but I did pay cash. I don’t know if I’ll ever buy a new car again (although I suppose I probably will) and I have no idea. I’ve driven my car for 5 years now, so at least another 5 years seems likely–it still feels new to me.

  11. Sensible suggestions (Though a few are obvious! save? no more debt? Well of course!) Most people reading a finance blog should have that figured out.

    As a single person, I’m already living on one income, but I have increased my spending since college. Thanks for reminding us to think about how we once lived on so much less

  12. bigfoot says:

    “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. ”

    I disagree. This behavior is unsustainable. If you get a raise, increase your savings, but don’t do it exponentially (i.e., raise the percent).

  13. Ron…

    Thanks for the thoughts. I agree with so much of what you are saying. I’m in my mid thirties and have been blessed most of my career with making a nice dollar. My wife and I have also been conscious enough to be healthy savers and givers. To be honest with you though I have been chasing this vapor of a dream called financial independence all the while not knowing what I will do when I get there. We have 2 wonderful children and I would love to spend more time with them. My father spend my child-hood working and that is something I desperately don’t want to look back when my children are older and wish I’d spent more time with them… kudos to you and your wife for the decisions that you made and the planning you put forth. We have a great foundation but like you said we need to spend some serious time understanding what the “goal” is and understanding “why” that is the goal and “what” that it will mean to achieve it…

  14. Good Post. We have the same goal overall, to both work part-time eventually. In the past we saved big for financial security and hopes of retiring early, etc. These days I find this a harder and harder goal to reach, but still aim to work less in our younger years, at the least. For us it is a means to an end – a very expensive end – retirement – but I love my job and will definitely enjoy the journey along the way – life is too short otherwise.

    But I just wanted to say that one thing I never really understood when graduating from college – why people lived up to their income so quickly. We saved the down payment on our first home by continuing to live like college students, first out of college when our income tripled. Oh sure, we spent another $1k a year or something each, but that was like a 10% raise – was huge – and we both were able to save a good $15k from our wage in a year. I can say my lifestyle didn’t change very much from $10k a year single in college to $100k/year combined just a couple of years out of college, and definitely built us a great foundation. Now we make far less as we slowed down to have kids, but the added bonus of never getting used to that kind of income, just made it that much easier. A lot of people around here waited a longer to have kids – more financial security. So the younger ones always wallow in how poor they are, and the older parents always struggle with decreasing their lifestyle so significantly when it came to children. I think we found a great balance where we were able to build up some financial security, and since we never got used to spending that income, it wasn’t much of a lifestyle change to lose an income.

    I think all the things you mention are just that much more important too when you live in a high COL area. You have to trim your expenses everywhere else because housing is such a big chunk. Believe me, I know.

  15. [...]My Money Blog talks about trying to avoid lifestyle inflation. [...]

  16. funnest isn’t a word, by the way. Great post, though!

  17. Jonathan, this is another well written post. One thing related to “Living on one income” and that should be an item on the top of the list, is “investing” which you have touched upon many times. I think for your situation, you really need to have some income generating investment in case one of you decides to quit work to take care of your childred. My wife and I bought a couple income properties last year and they have brought in nice income for us. We are living on the rental income while saving my salary. In case I decide to leave my job, we will still have enough income to support ourselves.

  18. Very nice post with insightful comments.

    This topic is near and dear to my heart as we have seen significant increases in our income the last several years and are now looking to purchase a much more expensive house to accomodate our growing family and our desire to live in a nicer house / area, etc.

    Like most of you, I have many personal goals that are the catalyst / driver for my financial ones. My struggle is in balancing competing needs / wants. Obviously, if I buy a bigger house, I also buy the additional expenses that come with it in terms of heftier mortgage, property taxes, utilities, etc.

    At the same time, however, I also get the enjoyment of living in a nicer neighborhood with a bigger lot and more space for everyone to live in. Are the perceived beneifts worth the “price of admission”? I am still unsure and find myself thinking about it…a lot. Unfortunately, I am finding that there is no one true / correct answer…only the one that is right for you. No doubt all of us have heard the phrase “one man’s trash is another man’s treasure”…seems it also applies with your chosen lifestyle as well (ex: what works for one person may not be agreeable to another).

    In the end, I absolutely agree that people should be cognizant of “lifestyle inflation” and be aware / informed about the choices they make and the trade-offs associated with them (ex: more $ needed to fund the lifestyle you want / need = more $ needed to fund it…plain and simple).

    I think the part that is often missing is that many people are in fact unaware / uneducated about their choices and have not really thought through them at all (I want it now…will worry about the “how” later). In my view, as long as someone knows what they are doing, then I will try not to criticize…even if it doesn’t work for me. However, if someone has no clue and is living in a dream world…then I’ll probably be a bit more vocal.

    EVERYONE posting here could live on less / save more…whatever your situation. It’s all about where YOU want to be (knowingly)…everyone else is…well, everyone else.

    You’ve got some fantastic readers here…thanks for the post.

  19. I agree, very good comments. I’ll reserve my replies for another post.

  20. to the couple that wants to pay $15,000 for a car: Get the ten thousand dollar one, because that’s the cash you have. OR get the five thousand dollar one. Stay out of your car. Invest in stuff for your bikes. Invest in public transport. Get the job that’s close to home. Get the home that’s close to the job. Stay out of the death box. Or yeah sit in it, let it propel you through traffic jams, have your tunes play. Sit in it. Push button, make go go. Just do this one thing for me: Consider the price as the sticker PLUS THE INTEREST, and shop based on that price. If the car is an investment in your necessary lifestyle, it shouldn’t cost $15,000. Save that shiny car for when you’ve SAVED enough to pay cash. Sorry I”m screaming, but it’s good advice.

  21. Thank you Jonathan–Ya, he does not want the car for 10-15 years! I am sure he will be itching for a new car by year 2. So, I am putting my foot down on the $15000 car idea!

    Thank you John–I completely get it–I really do…You wont believe what happened yesterday. :) I have been driving my boss’s car (he is like 70 something! and Japanese)..anyway, after I told him I was leaving his company for this new job–HE GAVE ME HIS CAR! can you believe that. :) He said “consider it a gift!” Anyway, my Bfriend is a little dissapointed cause he wont get his $15000 piece of metal–but I think he will get over it. So, today I am working on getting the title transfered over to me—YAY for me!! this JUST MIGHT save the relationship.. :)

  22. As for living on one income. If that is any ones goal, you need to do it NOW not later. To quote Seinfeld, “You should just do it like a Band-Aid. One motion! Right off!”

    If you don’t, you will get yourself in a position where you’ll tell yourself that it “can’t” be done because you can’t or don’t want to change your lifestyle. The ones that will really suffer and could care less of your lifestyle are your children.

    Again, if your goal is to live on one income – do it NOW.

  23. SallyC says:

    This is a topic I have considered a lot. When my husband got a large salary increase last July, we considered buying a larger home. But after thinking about it a lot, we decided to go as long as we can with our current one and to try to save as much of his extra income as we can. I think the biggest culprit’s in lifestyle Inflation are homes and cars. If you can stay in a smaller, less expensive home, as your salary increases, you’ll be one step ahead.

  24. Re: lifestyle inflation, I have found it extremely helpful to turn away from the numbers and simply make a ‘life list’. What are all the things I want to do/try/experience/accomplish in my life? Then compare the relative costs of those experiences, using those creative problem-solving skills to imagine how they might be done (or substituted!) inexpensively. THEN PURSUE THE LIST. This ‘permission’ and the fun/self-knowledge gained from the accomplishments helped so much to stave off the ‘if only I had a little more’ syndrome. Most of my list is not very money-dependent – I feel sorry for those who are not so lucky. Then again, it may be a case of ‘love the one you’re with.’ Find what’s wonderful about the life you can afford.

  25. We bought a home that was bigger than we were thinking (still well below our means) because a) we wanted to live close to family, and b) someone advised us that since most homes grow in value, if you buy a small home now, it basically “grows less” and would inhibit our ability to get into a bigger home later. Now that we are stagnating, I am wondering if it was the best thing to do. Though we are enjoying living by family immensely, so we think it’s worth it.

    My wife also cuts my hair, bless her heart! And she does a GREAT job at it! Saves money and time.

  26. I especially like the last point about cars. Cars are the worst investments Americans make, a new one loses about 20% of its value as soon as you drive it off the lot and 30% by the end of the first year. A finance-savvy individual would recognize the benefits of buying a pre-owned car a few years old verus a brand new car. I own a ’94 Geo Prism and it has 4 wheels and an engine and has been running smooth for 4 years. The money it has saved in not having to make car payments, not to mention gas, have been invaluable.

  27. You know what’s funny,

    It wasn’t until I made a significant income that I cared about my spendings. In college I would take out massive student loans to buy things musical equipment, party, go on trips, eat out. If i wanted it i would take the cheap student loan out to buy it. I was able to use that time to teach myself to play guitar, make music, play piano, program computers, build robots, all because of my carefree spending habits and my philosophy of “Do it now because later you’ll be working with no time left”.

    Well i’m working now as a programmer, making a nice income and paying off my great 8 yrs of college/gradschool. I basically have the same lifestyle now, except now I can pay off my college debt as well as save for ahouse. I have no regrets.

    There is no need to live so poorly in college.

    Live it up!

  28. I think your goal to live on one income is awesome! My husband (Erik Lane above) told me about your blog as we are working toward financial goals as well. In the beginning we both worked and we didn’t learn to live on one income before we decided that I would leave my paying job for the very rewarding life of a SAHM (we are the proud parents of 4 living children). That was going on 11 years ago and the only thing I would change about our decision was our poor money management leading up to and then after our income cut in half. Our family is very important to us and we have never regretted my being home with the kids. Since our dreadful mistakes (which were largely made out of ignorance about money) we have begun to slowly turn our financial situation around. We’ve definitely learned most of our financial lessons the hard way but I believe we’ve learned them for good.

    Keep pressing toward those goals – you’ve got the right idea and will be light-years ahead of most at your stage in life!

  29. “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.”

    How affirming! My husband and I are both working from home, and we’re ALMOST there – I have a bit more work right now, but I think that soon it’ll even out. And your dream is an excellent idea. Not many children get solid loving exposure to BOTH parents at that level.

    hln

  30. Good post, GREAT response. I liked Ron’s thoughts… I am one of those people who has the “million dollar goal” in mind. By nature I work better goal-oriented and so unless I’m at “the mark”, I keep at it. But some things take time… a million dollars (for me, at least) will take awhile. So during all that time, you don’t want to miss out on “smelling the roses” (sorry, it’s lame, but you know what I mean).

    For example, my boyfriend and I have been saving very hard for about three years now. It doesn’t seem like we’ve made a lot of progress, in comparison to the “magical” number we have set out for ourselves. However, when we actually realized how much we did save, we were like… wow. Let’s celebrate! And we took our first vacation together ever. And that vacation meant more to us than the money in bank, because we enjoyed each other and had fun, and made memories.

    It’s good to ask yourself, how does it make you feel knowing you have $xxx in the bank? Would $xxx more just be another number?

  31. I liked Ron’s comment a lot. He made a lot of sense. I have been saving and cleared most of my debt by now, but lately I have been thinking what I have been saving for, and I haven’t found any answer for that. But Ron’s comment on this blog just struck the chord. I don’t have his website link or any way to thank him, so I request right here permission to publish his comment in my blog. Thanks Ron…

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