Lifestyle Inflation – Are You A Victim?
How much did you earn when you first started working? Overlooking my paper-route, my first job was as a Subway sandwich artist the summer before my last year of school. I hated every second of it (the embarassing story of my mother sitting in on my interview is for another day) but I loved having the money. I thought I was rich – $6.25 an hour during the week and $9.37 on Sundays. I gave that job up when school started again, but when I heard what I was getting paid for my summer job the next year (a gift wrapper at a department store – Ahern’s, for anyone from Perth) I couldn’t get over how much I was getting paid. $10.20 an hour! $15.30 on Sundays! I figured I’d be swimming in it.
Unsurprisingly, I still managed to spend it. I stayed working at that department store for the next two years (a casual job during my first years of university). My salary went up with each birthday (to be in line with the award rate for my age) but still I managed to spend it. I didn’t get a better car or eat more expensive food or even really buy more expensive clothes. It all just got spent like it had when I earned less. This continued on – my first internship in the summer of my second year of university I earned bucketloads compared to my casual jobs… fancier Christmas presents were bought and I went on my first international trip.
Fast forward to about five years ago. I had a few credit cards and a line of credit. The line of credit was originally a consolidation loan for the credit cards, but I’d forgotten to close the credit cards and money had been spent on them again. Yes, I earned more but it got spent the same as when I’d got paid just $6.25 an hour. Sure, I’d moved out of home and had other bills, but if I had the knowledge I have today perhaps I’d at least have not been in debt too.
I see stories like mine every day. People consistently fall into the trap of what I call ‘lifestyle inflation’. As their salaries increase, so too do their credit card limits and they redraw on their mortgages to renovate houses or buy second cars. They have the means to get the things they previously only dreamt of having, so they acquire them and then move the goal posts again, ready for the next increase in income.
The worst part is that it often happens so incrementally that it’s hard to tell when it starts. Retrospectively, I’ve created a list of ways you can see if it’s happening to you:
- Things that used to be bought for a treat or on special occasions are being acquired more more frequently or have become an everyday purchase.
- In a pinch, you’re forced to ‘downgrade’ something (use a less flashy mobile phone, wear cheaper stockings, etc.) and find you don’t miss your expensive alternative… or find yourself enjoying the familiarity because you used to use it.
- Your circumstances haven’t changed in the last year or more, but your expenses have increased more than inflation. eg. you still live on your own, but you moved to a more fashionable suburb and your rent went up.
- You make unbudgeted purchases that are within your means, but you use the excuse that you (or the person you’re buying for) ’deserve’ it.
- In real dollar (not %) amounts, you’re saving the same amount each month as you were a year or more ago.
- You’ve told yourself that things will be easier when you earn more money. You start earning more but the problems seem the same.
Don’t misunderstand me, there’s absolutely nothing wrong with enjoying the benefits that can come with earning more money. However, there needs to be a line in the sand where enough is enough. Your savings and investments too should increase as your salary does (in real dollar amounts anyway - the percentages may not vary).
So how can you stop it happening to you? Being aware that it occurs is a darn good start. Here are some of the ways I look to prevent lifestyle inflation deja vu:
- Scott Pape of the Barefoot Investor puts it well when he suggests that you evaluate future purchases against the joy and pleasure derived from previous ones. For example, say you’re currently toting around a chain-store handbag that cost $200 (sorry gents, I’ll use handbags as an example because I’m somewhat of a handbag connonsieur). You lust after an Oroton or Coach handbag for $600. Scott’s method put into practice here would be to ask if the Oroton/Coach version would actually provide you with three times the pleasure that your $200 version would. Alternatively, think of the one thing in your life that provides you with the most joy. For Scott, it’s his dog. So he evaluates all purchases against that. If his dog cost $800 upfront and another $800 a year to look after, he has to ask himself – will this $800 thing I want to buy provide me with the same delight?
- Set yourself some rules and stick to them. The authors of ‘The Millionaire Next Door’ have a rule that if you ever want to be wealthy, you shouldn’t take out a mortgage any more than 2.5 times the total income of everyone responsible for paying that mortgage. You can whinge about whether or not that’s possible in your city to your heart’s content. Doesn’t make it any less true. As a bare minimum, I also aim to save (for investment purposes – not ’stuff’ purposes) at least 25% of my income.
- Believe in delayed gratification. In Robert Kiyosaki’s “Cash Flow Quadrant” he discusses a survey that was conducted on an international scale of people who represented the top and bottom 5% of the population in terms of net worth. Consistently across all countries, the people in the top 5% practiced delayed gratification whilst the bottom 5% sought immediate gratification. This is about making sure you meet your rules, mentioned above, before you go and buy fancy things… also often described as “pay yourself first”.
- Always think frugal. Have you ever seen Melinda Gates? Despite being married to the richest man in the world, she has one of the world’s most understated wedding bands, and doesn’t wear an engagement ring. In “The Millionaire Next Door” there is a story from one of the millionaires they interviewed for the book about the day he gave his wife $500 million in stock in the company he’d been building over their lives together. She smiled, thanked him and said it meant a lot… then went straight back to clipping coupons for their grocery shopping. Just because you increase your means, doesn’t mean you should stop caring what you pay.
Above all though, remember – despite the title I’ve given this post, lifestyle inflation is a choice (albeit often a somewhat subconcious one). If you’re reading this post and thinking the damage is already done, well – there’s always lifestyle deflation!
Questions? Comments? Feel free to email or tweet me.
