The first stage of fighting an opponent is understanding the opponent. In this scenario, we’re facing off with an ambiguous term dubbed in recent years: lifestyle inflation. Portions of lifestyle inflation are great and I highly encourage them, whereas, some types of inflation are negative or even destructive. Understanding lifestyle inflation may be the biggest piece of everyone’s money puzzle.
Understanding Lifestyle Inflation
The reason many millionaires don’t feel rich is because of lifestyle inflation or lifestyle creep, as some call it.
We make more, we spend more.
Some of that spend is well worth it. For me, it was a great day when I moved out of my parents house and started renting my own place with my own income.
Following along with my new sense of freedom, I quickly developed a knack for dining out with friends. The quality of food ranged from okay to good and for a long three months, I was spending more than I made.
This type of lifestyle creep was damaging to my health and to my wallet.
Despite reading books on managing my money, I still opted for the good and the bad of lifestyle inflation. Long story short:
Spending money is easier than keeping it.
Talk to any high paid lawyer or doctor and they might describe how they’re far from wealthy. Especially if they have a few hundred thousand in student loan debt.
As we earn more, we tend to upgrade different facets of our lifestyle. Many seek out a bigger home or nicer cars or fancier clothes. Our big one has been spending more on travel as we get older.
Once we upgrade one area, we’re thinking, “What’s next?”
Another danger for younger millennials is that our pay increases faster while we’re young and then slows down.
It is easy to start thinking pay raises are the norm.
We also fail to acknowledge some forms of responsibility that will be part of our budget in a few short years such as aiding older family members or providing for new children.
So, how do we keep what we want?
Curbing Lifestyle Inflation
Here’s the two step process I used to curb lifestyle creep:
First, view the daily cost as if it were an annual cost.
Simple and a great way to see how an insignificant leak will sink a large ship.
Second, view any potential savings as pre-tax IF our 401k is not maxed out.
An example is my old habit of ordering a $20 dinner every night. I’ll average out the daily cost at $25 to account for the occasional drink or two. At 365 days, the total cost of dining out each night was $9,125.
I still remember the first time I realized HOW HIGH that $ amount was. I couldn’t believe I was spending over 16% of my salary on dinner.
The thought crept in, “If I cook every meal, then the average dinner cost will be reduced to as low as $5. If I bank $20 in savings over 365 days, the total amount saved would be $7,300.”
(I didn’t end up saving $7,300, but I know it was close to $6,000.)
My favorite part of this process was when I used early savings towards maximizing my 401k.
Assuming a 30% marginal tax rate, a $6,000 post-tax savings is worth $8,571 in my 401k.
It still wasn’t easy to shift my behavior from dining out to cooking more, but thanks to the two step process, I was able to realize how much money I could save.
Curbing lifestyle inflation becomes much easier if we quantify our routines.
Gaining clarity on where we spend was tricky and almost scary, but we feel it has been well worth it for us.
What ways have you curbed lifestyle inflation in favor o?