This is #2 in my big Retirement Advice to Young Folks series.
Lifestyle inflation is the bane to early retirement. Heck, it’s the bane to having a balanced budget *period*. Most of us were starving students at some point in our lives and we spent very little. When I was in college, the only non-school related things I spent money on were groceries and rent. I rarely ate out, never took a spring break trip to some exotic locale, didn’t own a car, and was super cheap. Mrs. RB40 was the same way.
Lifestyle inflation is almost unavoidable when you start making good income. I don’t know anyone who was able to keep their student budget lifestyle in real life. I think Jacob at Early Retirement Extreme might be the only one I know of that is living on such a bare bones budget. I started saving for retirement right away and was able to avoid credit card debt in spite of all the enticing offers. However, I can’t deny that I went through the lifestyle inflation phase, too.
1-3 years after I graduated
- Housing. I got a 1 bedroom apartment by myself when I first started working. Previously, had always shared a room with a roommate. After a year, I shared the rent on a 2 bedroom apartment with a roommate, which saved some money.
- Groceries. This one is a bit cloudy because I can’t remember what kind of groceries I purchased exactly. However, I’m sure this expense category went up a bit. I tried different food ingredients and experimented with cooking much more than when I was in college. Overall, this is not a bad thing because cooking at home is a great skill to have.
- Entertainment. This one is a big one for me. I almost never paid for entertainment when I was in college so there was a big pent-up desire to spend money. Once I made some friends, we went out every weekend. Eating out, going to movies, concerts, shows, and clubbing are a lot of fun. It costs money, but when you’re young, you care more about having fun than saving.
- Car. I was driving a beat up Toyota Cressida and sadly I couldn’t say no to a car loan. I got a new Ford ZX2 and had a small car payment for 5 years. I should have saved up cash to buy a reasonable used car instead. At least we got 13 years of use out of the ZX2 (Mrs. RB40 and my brother drove it, too) before we sold it.
5-10 years after graduation
- Housing. I got married and we purchased our first home. We justified the size by expecting our family members to come visit us often. This is probably the biggest increase in our expense since graduation. Owning a house is nice, but it is a big expense.
- Groceries. About the same overall. Mrs. RB40 is partial to nice cheeses so our groceries expense went up a bit.
- Entertainment. After I got married, I went out a lot less than before. Currently, we go out once a week at most. However, we traveled internationally almost every year. That’s a big cost, but I think the experience is worth it.
- Car. We got a used ’98 BMW Z3 and paid cash for it. We loved that car and sold it in 2010 after it overheated. By that time, we were ready to buy a family car.
15 years after graduation to present
- Housing. We rented out our old house and moved to a smaller condo. It’s more expensive though. This is a major expense where we could have done better. In hindsight, we should have stayed in our old home until 2011. The housing price would have been much more affordable if we waited.
- Groceries. We spend more now because we like to eat a variety of foods and we also have a baby. This will only go up as he grows.
- Entertainment. We changed our plans to travel within theUSfor the next 5-10 years. It’s much easier to travel in country when you have a kid. He won’t appreciate international travel until he’s a bit older anyway. We haven’t spent much money on entertainment either because we don’t trust a babysitter. Besides, we’re too exhausted to go out.
- Car. We sold the BMW Z3 in 2010 and purchased a new Mazda5. We lived with no car and saved up for 3 months, then paid cash for the vehicle. I plan to drive this vehicle until baby RB40 goes off to college. We share one car so I wanted a newer vehicle that is more reliable.
As you can see, we didn’t do entirely great at keeping lifestyle inflation down. Even with the lifestyle inflation, we were able to save 100% of my take home pay over the last few years. This gave me the confidence to leave my job and go it alone. Currently, we spend $3,000 to $3,500 a month (see my August cash flow report.) This is a bit on the high side due to the housing cost, and that mistake is difficult to correct.
Advice for the young folks
- Saving. Setup an automatic saving system to take money out of your paycheck so you don’t spend it. One good way to do this is to contribute to the 401(k).
- Housing can be expensive and you should try to minimize it even if you are compensated well. Consider a duplex so you can have some help paying off the mortgage.
- Groceries. It’s almost always cheaper to cook at home so groceries is one place I’m not that worried about.
- Entertainment. Focus on experiences rather than collecting stuff. Those international trips were expensive, but I have fond memories of all the countries we visited. That guitar in the closet, not so much. I should have looked into guitar sales to save me money.
- Avoid car loans. 5 years is a long time to send payments to your bank. You can try Millionaire Teacher’s strategy of buying a junker, driving it for a year, and then selling it off at the same price. Share one car if at all possible.
Do you have any advice on how to keep the lifestyle inflation down? This is very basic, but it is so difficult to execute especially if you are compensated well. We haven’t been entirely successful at keeping our lifestyle inflation down in the past, but it’s been stable for a few years now. I don’t think our lifestyle will inflate much going forward because we are settled in with our routine now.
Photo credit: Toyota Cressida – flickr Hugo90
Photo credit: Ford Escort ZX2 – flickr kevin1024