Lifestyle inflation -the silent killer of dreams

by Adam on February 26, 2010

As we journey through life, it’s natural to want to make progress: to earn more; to see new things; and to grow personally and professionally. However, as our income hopefully grows, many of us quickly find new and exciting things on which to spend our newly earned pennies. After all, we work hard, we deserve it!

This in itself is fine. However it’s important to understand that once you become accustomed to nicer things it’s very hard to go back: beware of  ‘lifestyle inflation’.

The Silent Killer of dreams

Lifestyle inflation can creep up on you. Perhaps you begin earning a little more and decide to ‘upgrade’ a few things:

  • A nicer car that doesn’t smell
  • A better gym that doesn’t smell
  • A shiny phone contract that errr…you get the point.

If you allow it to continue you’ll be spending all of your income each month, regardless of how fast you can increase your earnings and any dreams that you have to be financially comfortable will never be fulfilled. Avoiding ‘lifestyle inflation’ is particularly important for those of us in our 20s and 30s because we may still have relatively modest lifestyles. You may be a student, or freshly graduated. Or like me, a few years out from graduation beginning to make progress in a career. One of the best tips I read whilst still at university that helped me to where I am today was:

“continue to live like a student for as long as possible”

And no I don’t mean crazy drunken weekday nights, or take-away pizza every day! Rather, continue to live conservatively like you did when you were a student. Most importantly, avoid finding new ways to spend your newly aquired income, (or that much anticipated raise for those of us already with an income).

Being in our 20s and 30s we are uniquely placed to be in a position to make a huge impact on our future wealth largely because we have so much time to let our pennies grow. We have also had less time to develop expensive habits. Ultimately, avoiding lifestyle inflation by keeping expenses low is a great way to leave you with enough pennies each month to begin investing.

The threat of lifestyle inflation is one of the reasons I gave for avoiding the purchase of a new car in Wednesday’s article on ‘How to afford your mid-life crisis car’: If you start off with a shiny new car, you’ll never want to drive an old ‘banger’ again. After all, no-one wants their life to get more uncomfortable; only better. That’s lifestyle inflation at work. It is one reason why so many people find themselves in debt, as acquiring debt allows us to make purchases to make our lives more comfortable, to ‘inflate’ our lifestyle without any increase in income!

Opportunity Cost

Magical Penny has been exploring the topic of debt this week, most recently: car debt. Sean, a Magical Penny reader and long-time friend, made his case in the comments that I was missing something: the opportunity cost paid when saving for a car rather than financing. Sean explains that hypothetically, during the 2 years of saving of a car, savers would miss out on:

“2 years of fault free motoring and the pleasure of owning a new car…”

…although he admits that:

“The problem with opportunity cost is that it’s very open to personal interpretation”.

Read the full debate by clicking here.

Sean’s completely right on this. Financial priorities are a very personal thing. For me, living without a car was a ‘big win’ that helped me to begin saving and investing. For others, the benefits of a new car (fault free motoring and pleasure) may seem worth it. The difficult part however is fully appreciating how much an experience is truly ‘worth’. The Magical Penny car post seeked to explore this from the perspective of  those of us at the beginning of our adult lives, where I believe that the cost of buying a new car is more than most people would think: particularly considering the different opportunity cost of not investing (missing out on stock market gains) having made the car debt a priority.

‘Live like no-one else so later you can live like no one else’

Dave Ramsey (US personal finance personality)

The first ‘Live like no-one else’ means living below your means, something that some of us don’t do very well. Taking out a car debt equal to several months of work is not truly living within your means even if you think you can afford the payments. In Sean’s example, given the huge potential that saving money in your 20s can have, it’s easy for me to accept the ‘opportunity cost’ of mising out on ‘the pleasure of a new car’. That said, some may take my argument to the extreme, lowering their lifestyle to nothing by surviving on ramen noodles and living in a tiny flat-share, all in the name of ‘compounding returns‘, saving a sizable chunk of their income in the hope of huge investment gains. As with most things, however, it becomes a question of finding the right balance for you and remember: Don’t completely mortgage today for the hopes of a pay-off tomorrow.

Personal finance is personal

And so to end this first week of posts about debt here at Magical Penny: I challenge you to think of a ‘big win’ of your own: To avoid spending on something that may seem ‘normal’ to those around you: a car, regularly eating out’, exotic holidays…etc. It’s not about depriving yourself of experiences or nice things, but reconsidering your wants: are they really worth it or is it better to ‘live like no-one else’ so in a few years you could have grown your savings to such an extent that they allow to ‘live like no-one else’.

Follow Magical Penny on Twitter for post updates and other thoughts, and sign up to the newsletter too -some special things are planned soon, only for subscribers! It’s free so join today!

{ 10 comments… read them below or add one }

Sean

Yay, mention for me.

However, you’ve completely p0wned me here. Just call me Mr. Lifestyle Inflation. As if typing this out on a shiny and ridiculously pricey iPhone wasn’t proof enough. The worst part is that there’s no going back, you become accustomed to these *things*. Run! Save yourselved whilst you still can!

Reply

Lucie

Hi Adam, just wanted to say thankyou for your advice. I’ve been getting the newsletter for a few weeks and it’s really helping me to organise and plan my finances :) lucie x

Reply

Jon

We are all victims of circumstance and fickle commercialised needs in the 21st Century.

On the one hand, I think most of us can admit to gratuitous spending to placate our material needs. I worry that I am guilty of many of the situations you mention above (gym, phone) and would be equally guilty of the car had lady luck not dealt me a good hand on that front.

The point your blogs make about keeping these in-check, and recognising the undue extravagence, is helpful, although I suspect I’ll just be happy to save anything left over (admittedly, diminishing as lifestyle inflation takes over!).

However, I’m starting to question the realty of whether we can *all* escape being victims of circumstance in the same way. I’d hate to think that by saving impressively now, I was somehow delaying inevitable choices that I would need to drive myself forward. It isn’t always so easy for people to think of the long game when you see young and successful twentysomethings carrying around exactly the same material assets/gym memberships, willing to tackle their financial situation later. In all likelihood, their personal finances are probably cack or they have acquired some alternative windfall. However, that is largely by-the-by. We as individuals feel the need to act in our own way. It may be to shun such expense, find alternatives (relatively rapid home-ownership as opposed to expensive apartment rent, say (both of which carry risks in themselve)), or somewhat follow the crowd.

Progressing as an individual sees fit is key. For many, that is lifestyle inflation, but provided it is based on *relative* financial security, it has to been seen as ‘necessary’ in a sense. As in, it can have self-esteem benefits, or the advantage of paying for more qualifications by staying in education longer, that help you move forward (c.f Maslow’s Hierarchy of Needs). Pursuing most options is almost certainly more expensive than ever, but not the same for everyone. In a lot of ways, this loosely relates to a more implicit case of ‘Opportunity Cost’.

While saving should, I feel, be a key element of lifestyle, I don’t feel it should come at the expense of immediate goals or desires. And some are more expensive than others. What we could all do better, I’m sure (certainly for myself), is take a second look and realise how we should prioritise (and if necessary, pay) for these, and which may simply be the commercialised chaff.

Have things got a bit out of control? Yes. Has the recession really curbed desires? Hardly. But I still hold that removing yourself isn’t necessarily that easy.

Reply

The other Adam

I think I agree with you here Jon, although Adam has made this point as well. Personal finance is personal. While it is important to watch your lifestyle, it is more important to prioritise what you do so that you’re happy with your life. No point saving away your 20s if you’ll look back and think “I’ve wasted that part of my life”. It’s also pointless living the high life early on only to find that you have to cut back later on in life. I’d like to use myself as another example here (I like to think everything happens to me don’t I?)

During my third year of uni I took a gap year to work at PwC. This meant while most of my friends were barely getting by at uni, I was living at home and for the first time in my life had money coming in on a regular basis. This went to my head, and once a few debts had been paid, I was was ‘living it up’. Gym membership, increased travelling, new phone, excessive amounts of DVDs and CDs and going out every weekend. It was great!

Then, my year out ended and I went back to uni, having saved nothing. I suddenely found that I was used to a certain lifestyle and had no ability to fund it. So I had to cut down a lot of expense, and it wasn’t easy. And I didn’t manage to cut it all out, and ended up in a bit of debt. Thankfully it was money loaned from my parents, so I paid no interest and was under no pressure to pay it back, but not everyone is that lucky.

I left uni a year and a half ago, and I’ve been working pretty much since then. That experience helped me to prioritise when I needed to spend, and when I needed to save. I have been able to treat myself regularly enough to be enjoying myself, but I have also managed to put away enough money to get a mortgage for a house. I don’t always get it right, for instance over christmas with trying to save and going out I was down to about £4 in my account.

I think the think I’m taking away most from this blog and the other comments is that if you do start to have more money than you are used to, prioritise and decide when you need to spend and when you need to save. It’s much easier to see a bit of excess in your account and treat yourself than it is to cut back when you’re used to a certain way of living!

Reply

The other Adam

I’m also glad Jon brought up Maslow’s Hierarchy of Needs. It is a very useful tool, and I have used it in quite a few situations. If people don’t know it, I would suggest looking it up as it is quite easy to understand.

It helped me prioritise my life goals (short-term and long-term), and it will give you an idea of where you are in achieving those goals.

Apologies for the short comment, but I thought it was worth bringing up.

Reply

2 Cents @ Balance Junkie

If you’re interested, I actually wrote about the Maslow-personal finance connection a while back. As the other Adam said, it’s all about priorities and taking things one step at a time. Great discussion here!

Reply

Adam

@Sean -I’m not worried about you :). I just wanted to remind people how easily it is to keep running on the hedonistic treadmill with nicer things now to make them happy but longer term ending up with nothing to show for years of hard work.
http://en.wikipedia.org/wiki/Hedonic_treadmill

@Lucie -I’m thrilled that you’ve found my writings helpful. Everyone needs to work this out for themselves but I’m glad I prompted you to think about your finances a little more. Thank you for commenting -it’s really encouraging.

@Jon -any blog comment that references Maslow’s Hierarchy of Needs is a winner in my book! You’re right that everyone has different circumstances and we have to find the right balance. My aim here is to get people thinking about things: you’re right about the risk of being victims of circumstance. I do however believe strongly that everyone has more power than they think: if they are willing to stop seeing saving as ‘depriving’ themselves, but rather working to provide their future self with a gift, they can make powerful progress.

@the Other Adam -Thanks for sharing your experiences. I’m sorry to hear about your time at university but am encouraged that you made it a learning opportunity.
As for the hierarchy of needs, the important thing is understanding what spending really is basic and what is more for ‘belonging’ and ‘esteem’: it’s not a ‘one size fits all’

@2 cents -Your article is an interesting read so thanks for bringing it up. To save everyone from googling the article the link is here:

http://balancejunkie.com/2010/01/14/your-financial-hierarchy-of-needs/

Reply

Monevator

I’m much closer to you than Sean, Adam. Apart from rent, which has increased (I’m in my mid 30s) and more meals out (but not too many more, and rarely at crazy expensive places) I definitely have a student edge to my lifestyle.

People see living as a student as a bad thing, yet they think back to their student days as among the happiest in their lives! Somewhat ironic. I see it as making more time for people and experiences than the dreaded *stuff*, and being too cheap to even consider battling “The Jones’s”.

Reply

FinEngr

Adam – Great post! Still catching up on my own new site, but looks like you have some quality content.

Really like the term: “lifestyle inflation”. Too often people can let themselves feel entitled with each new raise or job. Letting their expenses run out of control on the assumption of always making that or more, they’re face with a hard reality when the music stops.

Reply

Adam

Thanks Financial Engineer and Monevator for stopping by. You’re absolutely right. -in fact I just read a great new post by Tim Ferriss that mentioned this:

“Ramping up doesn’t have to be your goal. And we’re not talking just about the number of employees you have either. It’s also true for expenses, rent, IT infrastructure, furniture, etc. These things don’t just happen to you. You decide whether or not to take them on. And if you do take them on, you’ll be taking on new headaches, too. Lock in lots of expenses and you force yourself into building a complex businesss—one that’s a lot more difficult and stressful to run.”
http://www.fourhourworkweek.com/blog/2010/03/08/why-grow-and-other-wisdom-from-37signals/

Reply

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: