Avoiding lifestyle inflation

 

 

The Budgeting Series

 

 

*NOTE: This is part 3 of a series on budgeting.*

If you have missed the previous articles in this series, I encourage you to read them before moving forward – they are in linear order for the reader’s sake:

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?

As part of my series on budgeting, this is a post for those who, while having established themselves by making some money, should be aware of what affects scores of people: Lifestyle inflation. 

Yes, it’s a real thing – lifestyle inflation, that is, and it happens all the time. You start off with money constraints and make things work. It’s a struggle to pay your bills and provide, but it somehow works out. You’re on autopilot, you know what to do, it comes naturally (and is difficult), and days pass on. You’ve come to terms with your situation. You probably don’t like it and steadily look for ways to improve, but you’ve come to understand you are where you are – and you deal with it as best you can.

Then, magic happens, and you receive more money! Maybe it’s a promotion. Maybe another job or just a raise; whatever it is, you now have more money. You’ve heard it was called “disposable income,” but you’ve not had any before, mind you. What do you do with it?   

     

 

Because we’re not victims of lifestyle inflation, we can enjoy things like keeping and getting into other people’s honey bees! 

 

If you are like most people, you spend it before you get it. You live above your means, and the extra helps keep you above water. You’re paying off debt (or more likely paying ON it – just the minimum payments like 9 to 20% of other Americans and not making headway), paying off delinquent bills, or even purchasing new, exciting, and ultimately unnecessary things.

Maybe you get a new vehicle. Perhaps you purchase more of something – say clothes or new furniture. New tech gadgets sound awesome, don’t they? That newer, bigger T.V. on the wall looks great, coupled with that new sound system that shakes the house.

 

Questions we all should be asking

 

For most, questions often go unasked

 

At the onset, I want to say there is nothing wrong with any of the above purchases. BUT, you MUST ask yourself some questions:

Am I able to afford this purchase? (And yes, that is in terms of cash – unless you have the cash to finance something or you get the unicorn of financing – 0% interest. It does exist – it’s just hard to find).

Will the money I use for this purchase be tied up so I can’t use it when I need it? (Think using your emergency fund here).

Perhaps most importantly, will this purchase provide me with happiness? (spoiler alert: for most, the answer is no.)

Most of those questions go unanswered – or worse, unasked – and the accumulation of things robs us of our money and peace of mind. More money is coming in, and more money is going out. Things don’t change.

Lifestyle inflation is at work here. More money should help us have some peace of mind, but it often adds to our distress. We become dejected because the extra money we have isn’t helping us like we thought. Instead of compounding interest, we have compounding problems. Sheesh. Notorious had it right: mo money, mo problems.

There is a solution, though, and it’s simple in concept but often difficult in execution: It’s a change in mindset and behavior that helps us win the day and become victorious. Living within your means is all fine and good, but living below your means is where real victory is. Conveniently, in the budget series, that article is right before this one – and for good reason.

 

Living below your means

 

Live below your means and smoke your financial woes

 

Living below your means is the absolute best chance you have of avoiding lifestyle inflation – the two go hand in hand, actually. When you live below your means, your money goes further. You are likely out of debt and are smart with your money. When that extra cash comes, you can save more for retirement. After all, retirement waits for no one. Don’t just let it happen to you.

I can hear someone say, “Wait a minute. We need that money to pay for increasing bills. Taxes increase, insurance prices go up, things need to be done to our aging vehicles, and there are bills to pay!” Fair enough. I don’t want to take anything away from that argument because it’s a valid point. But if you live below your means, you are better prepared for those increases. The reason: you are paying for the simplest lifestyle there is, with a few luxuries to boot. Rare is the lifestyle with NO luxuries. What you are more app to see for those living below their means is a prudent lifestyle that indulges in a few but meaningful purchases. Buying stuff you don’t like to impress people you don’t care for is old hat – and most go into debt for it. No thanks, I’ll pass.

To do this, though, it necessitates you actually have a budget – which, according to CNBC and a survey they mention, 73% of Americans do not follow a budget.

That is madness. How do you know how much money you have if you are spending it all without tracking it? 

As written above, the objection is that the cost of things often increases as the years go by. You get a raise, which seems to get eaten up with increased taxes, insurance, maintenance, inflation, etc. For many, their “cost of living” raise is a moniker all too familiar. It costs more to live, and that’s exactly what the extra money they just got goes to. Trust me, I know. I have experienced being “house broke,” and I do not care for it AT ALL. I certainly understand all of the random expenses that creep up on you, compounding to eat at your finances. Yet, I would be remiss if I did not cast light on the most likely culprit when it comes to the continuous eroding of your money: behavior. Yes, behavior is likely the key factor in not just your lack of money but also your inability to save. Far too many people decry other reasons for their lack of money, but think about this: Why are there stories of people paying off massive amounts of debt in short amounts of time and doing it on what we would consider a normal paycheck? Nerdwallet details some of those stories here. Opploans details some stories about the same phenom. And, of course, I would be remiss if I did not mention the king of paying off debt – Dave Ramsey. He details some great stories here, here, and here. What do all of those stories illustrate? Behavior has much more influence than people give it credit for.

You can check out The Principle of Behavior And Not Circumstances for more info. Additionally, a distinction needs to be made between life inflation and lifestyle inflation. The difference is vital and should be made clear going forward.

 

Life Inflation

 

Life inflation is inflation overall – not desirable but expected with time

 

Life inflation can be defined as when normal and necessary costs increase over the years. It’s when your taxes increase, your insurance premiums increase, maintenance on your vehicles and home costs more over the years, your kid’s clothes are more expensive, etc. These are necessary for life and should not be confused with lifestyle inflation.

 

Lifestyle inflation

 

Lifestyle inflation eats away at your money and ability to thrive

 

Lifestyle inflation, however, is when you increase the comforts of your life as you get more money. This is when you get more memberships, more subscriptions, more recurring costs every month because more money is coming in – and to many, that means it needs to be spent. It’s called “disposable income” for a reason, right?

I don’t mean to say all of the things are necessarily bad per se; each family has their own priorities and desires. One family may decide to have a YMCA membership, another a yearly pass to their local amusement park. Still, others decide to keep and maintain a pool for their family enjoyment. In each of the above scenarios, families can and often elect to purchase things based on their increased finances. It isn’t the things and/or experiences but the behavior of spending your money as soon as you get it that needs to be dealt with.

Wouldn’t it be nice to have extra income – some financial margin, if you will – to save and prepare for unexpected costs? Living below your means allows you to do just that.

And, when you live below your means, those few luxuries you indulge in are appreciated more. Why? Because you don’t do them often. Think about your vacation(s) for a moment. I’m sure wonderful memories come to your mind, and it’s likely you look forward to your next one. Since your vacations are few, they are prized. If you were on perpetual vacation, though, you most likely wouldn’t enjoy vacations as much as when they are a break and rest from your normal routine.

Let me try another angle. Have you ever taken something for granted? You know that old saying: you don’t know what you’ve got until it’s gone. Have you ever experienced that? Have you ever lost something that, upon reflection, you realize was valuable, but you know you didn’t appreciate it to the fullest?

That’s what I mean when I say you enjoy your indulgences more. As I write this, I hesitate to use indulgence since it has negative connotations. Perhaps a better way to say it would be “the luxuries you invest in” because, after all, you are spending your hard-earned money. You are investing in pleasure – how much better if you truly enjoy what you spend your money on? Those investments pay dividends for years to come, with memories of enjoyable times.

However, it is difficult for some to avoid passive lifestyle inflation. Many people have a mindset they need to spend any money they have – even if they spend it on useless stuff. They enjoy spending money regardless of what they are buying. They need a mechanism to help them actively (and passively) avoid lifestyle inflation. That avenue, which I certainly advocate for, is the opposite – and I call it savings inflation.

 

Savings inflation

 

This is where you want to be – slow and steadily increasing your savings instead

 

The premise here is simple: instead of spending the extra money you make, you save it. As raises come, wages increase, salaries rise, or promotions are had, you specifically plan to set aside a portion of your money into some type of savings. It could be a savings, retirement, or investment account, but in the end, you are actively saving money. You will also be doing it passively because once you begin, you can set it up automatically, every paycheck – and you will live to learn without it. You will get used to not having that money at your disposal every month, and before long, you have extra set aside somewhere. Next thing you know, you have a sum of money to use in case of emergencies instead of a credit card. You’re digging your way out of debt, albeit slowly, and it’s because you put a plan in place to do so. And do you know how I know? Because I did EXACTLY what I just wrote.

Approximately a year before my son turned 18, I reached out to a fiduciary financial advisor (someone who has my best interests in mind, not an advisor trying to sell me something) to inquire about investments, savings, and what my wife and I wanted to enjoy/get out of life. I was paying $600 a month for support, and with the light at the end of the tunnel, I put a plan into motion.

I had lived without $600 a month for several years and didn’t want to succumb to lifestyle inflation; I had seen too many guys go that route. The number of guys I knew who bought boats, motorcycles, or other toys right after they were done was astounding. To me, this was the PERFECT time to start savings inflation; having spent years paying, I merely transitioned the money to savings. I didn’t miss it since I was without it for so long.

We built up a joint investment account we call the “emergency/opportunity” fund (E/O) before we began to automatically start building up the IRAs we have. We already have an established emergency fund elsewhere, but I like the extra cushion and flexibility the E/O afforded us.

Once I became satisfied, I started to put money into our respective IRAs. As of writing this, we have been fortunate enough to save thousands because we practiced savings inflation. We were able to practice savings inflation because we lived below our means. And we could live below our means because we changed our behavior. Notice a pattern here?

Another great tool to help you with savings inflation is the robo-investing platform Acorns. Personally, I really love Acorns. I opened an account for us at the start of 2022 and custodial accounts for my 3 younger kids. Every week, we put $5.00 in each of the custodial accounts. We are up to $20.00 a week for us, the platform keeps track of our purchases, and when the round-up feature gets to $5.00, it puts that into the account. Now, all accounts combined, we have over $2,400 in there after a year and a half. Granted, we are not breaking records, but we have money elsewhere, too. The key takeaway here, though, is that you have to start SOMEWHERE. And in the field of savings inflation, I’m fully on board the Acorns train.

*I do NOT get any kind of compensation from Acorns for repping them here; I simply use and appreciate their platform. IF you are from Acorns, though, I certainly wouldn’t turn down financial compensation ?*

Oh, and by the way, we are a single-income household. Yes, it can be done. Behavior plays a much bigger part than we realize, and most are willing to admit.

 

The skilled trades have a unique opportunity

 

Unique jobs, good pay, ample opportunity – what’s not to appreciate?

 

Elsewhere, I have written about just how good the skilled trades have it. It is so good; in fact, it often brings out the ire of some. Check out some of these articles below for some more detailed background information for this section.

• Let’s talk about the skilled trades
• Why skilled trades have the best game in town
• The pros and cons of the skilled trades
• The benefits of the skilled trades 
• NOW is the time to get into the trades

In the above articles, I outline how some of the skilled trades find themselves in enviable positions. Because I believe this is true (having been a personal example myself), I feel it is only right to admonish my brothers and sisters to take advantage of the opportunities afforded them. If my family can do what’s been done with a single income, imagine what is possible with two incomes! Many guys I know have wives who work and have good benefits (I have in mind medical/dental here), and their pay is decent. Yet, they had car/truck payments, saved very little, and were victims of lifestyle inflation. I personally watched others purchase a boat, motorcycle, new truck, etc., as soon as they had money freed up. Again, I’m not saying those items are negative, but I can’t help but think about what that money would look like in an account and how much peace of mind it might bring. 

Because I know lifestyle inflation can be avoided with a single income, I KNOW it can be taken to new heights when more than one income is in play. This is especially true for those in the skilled trades. 

 

Invest in yourself 

 

Don’t forget to invest in yourself

 

I’m not selling you a product I wouldn’t buy – I’m invested in this 100%. The money we save is, for all intents and purposes, a bill to me; it’s off-limits. Setting it aside is as natural as paying the recurring monthly bills, and at the foundation of all this is a behavioral change.

Avoiding lifestyle inflation is a choice. It’s a choice to stop being poor, it’s a choice to stop feeling trapped, unable to climb out of debt, to take charge of your life and finances, and to transform your legacy.

The ball is in your court. What you do with it is up to you, but I beseech you not to just let retirement happen to you. Start small and take charge, change your situation, and live victoriously.

 

Conclusion

 

 

Hopefully, by now, you have had your mindset challenged a bit. Far too many people fall into the trap of lifestyle inflation and never really experience freedom from financial burdens – and this seems true for most of my brothers and sisters in the trades, too. So, understanding core concepts of budgeting is crucial to break free from poor behavior. 

Because of the above, I’ve taken the time to break down the articles for the budgeting series I am putting out and put them in linear order – one builds on the next. Here they are: I’ll amend articles and include this list at the bottom of each, making it simpler to navigate from one to the other.

 

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?

*NOTE: This is part 3 of a series on Budgeting*